On the International Spillovers of US Quantitative Easing

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. While most of the debate has focused on the effects of QE on the US economy, foreign policy-makers -in particular in emerging markets-argued that QE policies have created excessive global liquidity and caused an acceleration of capital flows to EMEs. In turn, this capital flow surge is widely blamed for appreciation pressures on EME currencies and a build-up of financial imbalances in EMEs. Terms of use: Documents in EconStor mayTo shed some light on this issue, the paper analyses the effects of the Federal Reserve's unconventional policies on the US and on 65 foreign financial markets. Importantly, the paper extends the existing literature by investigating the effects on both global asset prices and capital flows. For this purpose, we use a relatively novel database of daily portfolio flows into bond and equity mutual funds, taking primarily a US investor perspective. In this way, we can track capital injections into funds (portfolio flows) across countries.We analyze different types of US unconventional monetary policy measures (liquidity operations, purchases of MBS and of US Treasuries) in order to understand whether and why QE1 and QE2 have exerted different effects on US and foreign markets. In contrast with most of the literature on US QE, which has focused narrowly on announcement effects, we make a distinction between announcements of Fed interventions and the actual market operations.The results in the paper illustrate how US monetary policy since 2007 has contributed to portfolio reallocation as well as a re-pricing of risk in global financial markets. First, we find that Fed measures in the early phase of the crisis (QE1) were highly effective in boosting bond and equity prices, especially in the US, and led to US dollar appreciation. Conversely, QE2 boosted equity prices worldwide and led to US dollar depreciation. Yet Fed policies functioned in a pro-cyclical manner for capital flows to EMEs and in a counter-cyclical way for the US. QE1 triggered a portfolio rebalancing across countries out of emerging markets (EMEs) into the US, while QE2 triggered rebalancing in the opposite direction. This finding may be interpreted as lending support to the concerns expressed by policymakers in EMEs. The results suggest that there are indeed global spillovers and externalities from monetary policy decisions in advanced economies. However, the paper is mute on whether such externalities are overall positive or negative for other economies. The potentially...

U.S. Monetary Policy and International Bond Markets

“…In a follow‐up paper, Bauer and Neely () use dynamic term structure models to parse out the extent to which the declines in foreign interest rates occurred through the signaling or portfolio rebalancing channels and find evidence that both channels were in operation during the unconventional policy regime. Our paper is also related to the work of Fratzscher, Lo Duca, and Straub () and Bowman, Londono, and Sapriza (); the former paper systematically analyzes the global spillovers of the Federal Reserve's asset purchase programs on a broad array of financial asset prices, while the latter study empirically quantifies the spillover effects of U.S. unconventional policies on emerging market economies. The key takeaway of these two papers is that U.S. unconventional monetary policy measures induced a significant portfolio reallocation among investors and led to a notable repricing of risk in global financial markets…”

Unconventional monetary policy spillovers: Evidence from India

“…Some other studies find that the direction of portfolio flows has changed over different phases of Quantitative easing. Quantitative easing I resulted in portfolio flows out of the EMES to equity and bond markets in the United States whereas Quantitative easing II resulted into a rebalancing of portfolio flows in the opposite direction (Fratzscher, Lo Duca, & Straub, ). This study also discusses about portfolio rebalancing across asset classes during the UMP era.…”

A Survey of the International Evidence and Lessons Learned About Unconventional Monetary Policies: Is a ‘New Normal’ in Our Future?

“…(2015), Fic (), Fratzscher et al . (; ). [Color figure can be viewed at http://wileyonlinelibrary.com]…”