Unconventional Monetary and Exchange Rate Policies

Abstract

This paper explores the direct effects and spillovers of unconventional monetary and exchange rate policies. We find that official purchases of foreign assets have a large positive effect on a country's current account that diminishes considerably as capital mobility rises. There is an important additional effect through the lagged stock of official assets. Official purchases of domestic assets, or quantitative easing (QE), appear to have no significant effect on a country's current account when capital mobility is high, but there is a modest positive impact when capital mobility is low. The effects of purchases of foreign assets spill over to other countries in proportion to their degree of international financial integration. We also find that increases in US bond yields are associated with increases in foreign bond yields and in stock prices, as well as with depreciations of foreign currencies, but that all of these effects are smaller on days of US unconventional monetary policy announcements. We develop a theoretical model that is broadly consistent with our empirical results and that highlights the potential usefulness of domestic unconventional policies as responses to the effects of foreign policies of a similar type.JEL Classification: F36, F42.

Unconventional Policies and Exchange Rate Dynamics

“…The magnitude of the exchange rate depreciation is similar to the one obtained by Blanchard et al (2015), who find evidence suggesting that FXI is effective in stemming appreciation pressures arising from global flow shocks. At the same time, Bayoumi et al (2016) and Gagnon et al (2017) find that an increase in FX reserves of 1 percent of GDP increases the current account balance in range around 0.5 percent.…”

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

“…Overall, however, the evidence linking QE and UMP to exchange rates is far from conclusive (see Gagnon et al ., ). Figure shows the range of estimates in the literature on the impact of spillovers from QE to exchange rates and sovereign bond yields.…”