Abstract
Due to the severity of the 2007-2009 financial crisis, the United States Federal Reserve aggressively lowered the policy rate to zero and adopted several “unconventional” monetary policies, including “Quantitative Easing (QE).” The literature has long suggested that US monetary policies had strong spillover effects on foreign countries. Accordingly, the governor of Taiwan's central bank, Dr. Fai-Nan Perng, expressed strong concerns about such ripple effects of US policy on the Taiwanese economy. This paper follows Ammer et al. (2016) to use the Federal Reserve's unconventional monetary policy announcements to support the claim that US monetary policy has significant impacts on the Taiwanese economy and financial markets. Also, the spillover effects of pre-crisis “traditional” monetary policies are compared with the spillover effects from implementing “unconventional” policies during and post-crisis. The results show that US monetary policies exert significant impacts on the Taiwanese economy. Finally, we discuss the response of Taiwan's central bank to these spillover effects.
Highlights
After the 2008 financial crisis, the Federal Reserve implemented unconventional monetary policies to stabilize the global financial markets, such as purchasing a considerable amount of treasury bonds and mortgage-based securities (Wang et al, 2015)
According to Lima et al (2016)’s research, the quantitative easing policies implemented by the US, Japan and the UK have a positive effect on the stock market, and promoted domestic demand in small economies (Kolasa and Wesołowski, 2020)
The results show that the Federal Reserve announcement of QE policy that led to lower bond yield by ten basis points and an appreciation of the Taiwanese exchange rate, especially in the 1-day and 5-day period after the announcement
Summary
After the 2008 financial crisis, the Federal Reserve implemented unconventional monetary policies to stabilize the global financial markets, such as purchasing a considerable amount of treasury bonds and mortgage-based securities (Wang et al, 2015). This period of unconventional US monetary policy was followed by large capital inflows into emerging countries, which affected the profitability of emerging countries’ export industry and growth performance through rapid appreciation of currencies. Bhattarai et al (2021) found that the US quantitative easing policy has a significant impact on emerging markets It leads to exchange rate appreciation, stock market rises, long-term bond yields fall, and large amounts of capital flow into these countries (Fratzscher et al, 2018). Kiendrebeogo (2016) found adverse effects for most countries, notably in economies with
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