Unconventional monetary policy and international equity capital flows to emerging markets

Christoforos K Andreou,Nebojsa Dimic,Vanja Piljak,Andreas Savvides

doi:10.1111/eufm.12312

Christoforos K Andreou, Nebojsa Dimic + Show 2 more

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https://doi.org/10.1111/eufm.12312

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Abstract

AbstractThis paper examines the relationship between monetary policies pursued by three major central banks (U.S. Federal Reserve, European Central Bank and Bank of Japan) and net equity capital flows to emerging markets (EMs) by global investment funds. We focus on two aspects of central bank policy: The growth of central bank assets and the surprise element of asset growth. We find, first, positive, economically large and statistically significant spillovers from the U.S. Federal Reserve asset growth to EM equity inflows following the adoption of unconventional monetary policies. Second, U.S. Federal Reserve and (to a lesser extent) European Central Bank asset growth surprises are negatively related to EM capital flows.

Highlights

ANDREOU ET AL.This study investigates the effects of unconventional monetary policy (UMP) by the major central banks on international capital flows
In the aftermath of the crisis, the level of policy interest rates reached the zero lower bound (ZLB) in developed markets and forced central banks to resort to UMP, which, in turn, affected the dynamics of international capital flows into emerging economies (Ahmed & Zlate, 2014; Chari et al, 2020)
Given that we look at three central banks, the empirical specification includes the economic policy uncertainty index relevant to each central bank, that is, the US EPU for the Federal Reserve (Fed), Europe EPU for the European Central Bank (ECB) and Japan EPU for the Bank of Japan (BoJ). 12Descriptive statistics for net equity capital flows to each individual country are reported in Appendix A1

Summary

| INTRODUCTION

These results provide support to the oft‐cited (but little researched in the academic literature) view on the spillover effects of global liquidity increases, made possible by UMP (especially by the Fed), on capital flows to EMs. Second, our study finds a negative and significant relationship between the surprise component of central bank asset growth and capital flows to EMs. Our evidence shows that global investors respond negatively to uncertainty and unexpected changes in Fed and (to a lesser extent) ECB monetary policies by reducing equity investment to EMs. The remainder of the paper is organized as follows.

| LITERATURE REVIEW

| METHODOLOGY

| EMPIRICAL RESULTS

| Results for three EM regions

| SUMMARY AND CONCLUSION