Taper Tantrums: QE, its Aftermath and Emerging Market Capital Flows

Abstract

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Capital inflows to emerging countries and their sensitivity to the global financial cycle

“…On the reasons why the sensitivity of capital flows to their main drivers has changed, we concur with Chari et al (2017) that the period of the US unconventional monetary policy may have changed the transmission of the monetary policy shocks to the rest of the world. This explanation is also consistent with theoretical contributions (Caballero & Kamber, 2019) showing that unconventional monetary policies fuelled search‐for‐yield investment by global investors and reduced the magnitude of their response to risk‐off episodes.…”

“…A notable exception (Avdjiev et al, 2020) looks at the impact of common factors on international bank lending and bond issuance and recognizes that the TT could have persistently decreased the sensitivity of international bank lending and international debt securities to the US monetary policy and the global volatility index (VIX). Another contribution (Chari et al, 2017) tests for two structural breaks, the GFC and the TT, restricting however the time‐break investigation on one specific push factor and on a smaller set of capital flows, namely the impact of what they identify as US monetary policy shocks on US portfolio investments towards EMEs.…”

On international integration of emerging sovereign bond markets

“…See alsoChari et al (2017).7 EM local currency private bond markets have also grown rapidly, outpacing the growth of EM local currency sovereign debt(IMF, 2016).…”

International Capital Flows at the Security Level – Evidence from the ECB’s Asset Purchase Programme

“…If unconventional monetary policy is successful in raising the price and lowering the yields of such assets, investors will seek higher yielding assets abroad. These effects may be reinforced via the duration risk channel as the reduced supply will induce investors to accept a smaller term premium for long-term bonds which further lowers their yields and increases their incentives to invest in higher yielding foreign assets (Chari et al, 2017). In particular, rebalancing may happen towards bonds with similar characteristics via "preferred-habitat investors" (Vayanos and Vila, 2009), but also towards riskier assets under the risk-taking channel.…”