Abstract
This paper aims to trace the monthly responses of equity prices, long-term interest rates, and exchange rates in Asian developing markets to the US unconventional monetary policy (UMP). The main research question is to explore whether UMP shocks exist in those markets. We also consider the differences in the mean responses of those asset prices between traditional and non-traditional monetary policy phases. To address such concerns, we employ a panel vector autoregression with exogenous variables (Panel VARX) model and estimate the model by the least-squares dummy variable (LSDV) estimator in three different periods spanning from 2004M2 to 2018M4. The first finding is that UMP shocks from the US are associated with a surge in equity prices, a decline in long-term interest rates, and an appreciation of currencies in Asian developing markets. In contrast, the conventional monetary policy shocks from the US seem to exert adverse effects on these recipient countries. These empirical results suggest that the policymakers in Asian developing countries should cautiously take into account the spillover effects from the US unconventional monetary policy once it is executed.
Highlights
The global financial crisis (GFC) has left tightened credit conditions and dysfunctional financial markets, lowering interest rates in advanced countries to the zero-lower bound (ZLB)
The impulse response function (IRF) of US macroeconomic variables to one standard deviation of shadow short rate (SSR) shocks is depicted in Figure 6 above
As a prime gauge of stock market volatility, a negative response of VIX Index implies that the monetary policy mitigates the fear of financial turmoil and economic instability in the US
Summary
The global financial crisis (GFC) has left tightened credit conditions and dysfunctional financial markets, lowering interest rates in advanced countries to the zero-lower bound (ZLB). In response to the ZLB, central banks in advanced economies engaged the unconventional monetary policy (UMP). Two types of unconventional monetary policies are, first, a forward guidance of future interest rates, and second, large-scale asset purchases (LSAPs), which refers to purchasing a large amount of both Treasury and agency securities. On November 2008, the US Federal Reserve initiated ‘quantitative easing’ (QE) by which a central bank purchases government securities, aiming at altering the global conditions (Rafiq 2015) and providing liquidity to ailing financial sectors (Wright 2012). Brana et al (2012) suggest that excess global liquidity is able to boost the economic prospect in developing nations. On the other hand, Lorenzoni (2008) argues that large capital inflows can result in a credit boom, leading to a collapse in asset price and further causing economic
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