Impacts of conventional and unconventional US monetary policies on global financial markets

Shigeki Ono

doi:10.1007/s10368-019-00456-z

Abstract

This paper investigates the impacts of conventional and unconventional US monetary policies on global financial markets, using the global vector autoregressive (GVAR) model from 2004 through 2017. The impulse response results suggest unconventional easing had little effect on stock prices as in conventional easing while the responses of interest rates indicate liquidity was provided throughout the world. An unconventional US monetary tightening policy shock could effectively affect the stock prices of the world as is the case with a conventional US monetary tightening shock. Furthermore, the transmission of a US monetary policy shock to stock prices via exchange rates tends to attenuate the decrease in stock prices both in the conventional and unconventional tightening (the exit from a zero rate) phases. On the other hand, the transmission tends to push down stock prices in the conventional, unconventional monetary easing and the unconventional tightening (the shadow rate is negative) phases.

Highlights

This paper investigates the impacts of conventional and unconventional US monetary policies on global financial markets
Whereas Hajek and Horvath (2018) claim that the effects of unconventional monetary policy measures of the European Central Bank (ECB) on consumer prices are weaker than those of conventional measures, this paper revealed that the effects of the Federal Reserve (Fed)’s unconventional monetary policy measures on stock prices were weaker than conventional measures
This paper investigates the impacts of conventional and unconventional US monetary policies on global financial markets with weekly data of 23 countries and areas, employing the global vector autoregressive (GVAR) models

Summary

Introduction

This paper investigates the impacts of conventional and unconventional US monetary policies on global financial markets. This paper investigates what role exchange rates play as a transmission channel of a US monetary policy shock to stock prices. Whereas Chudik and Fratzscher (2011) employ weekly data in the GVAR model and analyze the role that the tightening in liquidity conditions and the collapse in risk appetite played in the global transmission of the financial crisis, this paper compares the spillovers of conventional and unconventional US monetary policies in the tightening and easing phases. Because no other studies have comprehensively compared conventional and unconventional as well as tightening and easing phases yet, including these two tightening phases, this paper presents differences among them in responses to a monetary policy shock.

The global vector autoregressive model and identification

Data and model setup

Empirical results

GVAR-based counterfactual analysis

Findings

Conclusions