US Unconventional Monetary Research Articles

US non-linear causal effects on global equity indices in Normal times versus unconventional eras

This paper examines global spillover Quantitative Easing (QE) impacts of US on stock market indices by employing apart from a classical Granger causality, also a non-linear quantile regression approach for detecting causality on the tails of the stock indices’ distributions. Before US unconventional monetary policies, the non-linear causal relationship between the Fed’s balance sheet and stock markets is found to be not significant for most indices over the middle level of quantiles, whereas significant causal relationships are present in tails. There is non-linear evidence that the Fed’s assets were mainly influenced by US, Latin American, Australian and some Asian indices while the other stock indices did not Granger cause balance sheet enlargement for any quantile interval before 2008. Nevertheless, almost all domestic and foreign stock indices are found to exert feedback effects during US QE. We argue that US total assets exert non-linear causality towards all stock indices under scrutiny at least at one level of quantile and tighter links of the Fed mainly with advanced economies are found, as impacts on the upper quantile are stronger during US QE.

Spillovers of US Unconventional Monetary Policy to Emerging and Advanced Countries

This study investigates the international spillover effects of US unconventional monetary policy — frequently called large-scale asset purchases or quantitative easing (QE) — on advanced and emerging market economies, using VAR models with high-frequency daily data. Blinder (2010) argues that the QE measures primarily aim to reduce US interest rate spreads such as term premiums and risk premiums. Considering this argument, we use two interest rate spreads as indicators of the QE policy: the mortgage spread and term spread. Empirical findings, based on data from 20 emerging and 20 advanced countries, reveal that US unconventional monetary policies significantly affect financial conditions in both emerging and advanced countries by altering the risk-taking behavior of investors, which suggests that the risk-taking channel plays an important role in transmitting the effects of these policies to the rest of the world. The extent of these effects depends on the type of QE measures. QE measures such as purchases of private-sector securities that lower the US mortgage spread exert stronger and more significant spillover effects on international financial markets than do measures that reduce the US term spread. Furthermore, the estimated financial spillovers vary substantially across countries, as well as between and within the two country groups, emerging markets and advanced countries.

Impact of US unconventional monetary policy on dynamic stock-bond correlations: Portfolio rebalancing and signalling channel effects

This paper investigates the impacts of both the portfolio rebalancing and signalling channel effects associated with US unconventional monetary policy on the dynamic correlation between the stock and bond markets at different levels of stock-bond market correlation distributions. The empirical results reveal that the portfolio rebalancing channel has a strong and predominantly negative effect on the dynamic stock-bond market correlations. In contrast, the signalling channel positively affects the dynamic stock-bond market correlations. The results also provide evidence of an asymmetric effect at the lower quantiles. These findings hence provide valuable information for policymakers, traders and portfolio managers.

US unconventional monetary policy and Islamic equity indices

PurposeThis paper aims to constitute to the first empirical work that investigated the effects of US unconventional monetary policy shocks on Islamic equities.Design/methodology/approachThe authors used the spread between sovereign (term spread) and corporate (corporate spread) yields as proxies of unconventional monetary policy in times that FED implemented different rounds of large-scale asset purchasing programs.FindingsThis paper demonstrates that monetary policy shocks have significant effects on Islamic equities. The analysis showed substantial evidence that the corporate spread innovation was reflected as a positive signal in Islamic equity markets and has a larger impact on Islamic low leverage equities than term spread.Originality/valueThe objective of this paper is to shed some insight into the effects of US unconventional monetary policy on low leverage financial assets. It is hypothesized that during this period, specifically from November 2008, unconventional monetary policy and zero bound interest rates have been implemented in the US economy. However, the strength of effects of this range of policies on Islamic financial products is unidentified.

Spillovers of US Unconventional Monetary Policy to Emerging and Advanced Countries

Spillovers of US Unconventional Monetary Policy to Emerging and Advanced Countries

Direct and Spillover Effects of Unconventional Monetary and Exchange Rate Policies

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.

Unconventional Monetary and Exchange Rate Policies

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.

Unconventional Monetary Policy in a Small Open Economy

This paper investigates the effects of unconventional monetary policy in a small open economy. Using recently proposed shadow interest rates to capture unconventional monetary policy at the zero lower bound (ZLB) we estimate a Bayesian structural vector autoregressive model for Canada - a useful case where foreign shocks can be proxied by U.S. variables alone. We find that, during the ZLB period, Canadian unconventional monetary policy increased output (measured by industrial production) by 0.013 percent per month on average while US unconventional monetary policy raised Canadian output by 0.127 percent per month on average. Our results demonstrate the effectiveness of domestic unconventional monetary policy and the strong positive spillover effects that foreign unconventional monetary policies can have in a small open economy.

The Effects of US Unconventional Monetary Policies in Latin America

This paper offers an empirical analysis of the way in which US unconventional monetary policy has affected Latin American countries. First, we estimate the effects of US monetary policy announcements on sovereign bond interest rates, exchange rates and stock market indices for a set of emerging countries, including five Latin American economies. We find that QE announcements in 2008/2009 and the “tapering talk” in 2013 generated sizable sovereign yield and exchange rate fluctuations. We further find some excess response of Latam asset prices that disappear once we take into account their country characteristics. In the second part of the paper we estimate a simple model that measures the influence of country-specific macroeconomic fundamentals on the transmission of US financial disturbances. An estimated model including the inflation rate, the CDS spread, the ratio of official reserves and market capitalisation explains some of the observed cross-country heterogeneity of spillovers from US monetary policy announcements. Under this model, a greater impact from the normalisation of US monetary policy can be expected in Latin America relative to other emerging economies.

Spillover Effects of United States’ Unconventional Monetary Policy on Korean Bond Markets: Evidence from High‐Frequency Data

We empirically investigate the effects of US unconventional monetary policy (UMP) on Korean bond markets using a high‐frequency event‐study approach. We find that: (1) Not every instance of UMP‐related news affects the domestic bond yields at daily frequency; (2) UMP news affects only short‐term foreign bond investment with high‐frequency arbitrage opportunities; (3) Factor analysis suggests that net foreign bond investment is affected more by expectation on future US short‐term policy rates compared to long‐term risk premia in the US Treasury market; and (4) Credit default swap premium for South Korea, proxi of local risk factor, also affects net foreign bond investment. Based on our empirical findings, we conclude that, while push factors do not dominate pull factors, the Korean bond market is not a “safe haven” from the normalization of US monetary policy and regulators should examine closely the share and composition of foreign bond investment.

US investment in global bonds: as the Fed pushes, some EMEs pull

We analyse reallocations within the international bond portfolios of US investors. The most striking empirical observation is a steady increase in US investors’ allocations towards emerging market local currency bonds, unabated by the global financial crisis and accelerating in the post-crisis period. Part of the increase in emerging market economy (EME) allocations is associated with global ‘push’ factors such as low US long-term interest rates and unconventional monetary policy as well as subdued risk aversion/expected volatility. But also evident is investor differentiation among EMEs, with the largest reallocations going to those EMEs with strong macroeconomic fundamentals such as less volatile inflation and more positive current account balances.

Financial crisis, US unconventional monetary policy and international spillovers

We study the impact of US quantitative easing (QE) on both the emerging and advanced economies, estimating a global vector error-correction model (GVECM). We focus on the effects of reductions in the US term and corporate spreads. The estimated effects of QE are sizeable and vary across economies. First, we find the QE impact from reducing the US corporate spread to be more important than that from lowering the US term spread, consistent with Blinder's (2012) argument. Second, counterfactual exercises suggest that successive US QE measures might have prevented episodes of prolonged recession and deflation in the advanced economies. Third, the estimated effects on the emerging economies are diverse but generally larger than those found for the United States and other advanced economies. The estimates suggest that US monetary policy spillovers contributed to the overheating in Brazil, China and some other emerging economies in 2010 and 2011, but supported their respective recoveries in 2009 and 2012. These heterogeneous effects point to unevenly distributed benefits and costs of cross-border monetary policy spillovers.

Financial Crisis, US Unconventional Monetary Policy and International Spillovers

This paper studies the effects of unconventional monetary policies in the major advanced economies. We first examine the cross-border financial market impact of central bank announcements of asset purchase programmes based on event studies. We find marked effects, as expansionary balance sheet policies influence the prices of a broad range of emerging market assets, raising equity prices, lowering government and corporate bond yields and compressing CDS spreads. We then study the economic impact of US quantitative easing on both emerging and advanced economies, based on an estimated global vector error-correcting macroeconomic (VECM) model, which takes into account trade and financial linkages. We focus on the effects of reductions in US term and corporate spreads, and in US market volatility. The estimated effects are sizeable and differ across economies. First, US QE measures which help to lower market volatility and reduce corporate spreads appear to have had far greater impact than lowering term spreads, as Blinder (2012) suggested. Second, such measures have prevented a prolonged recession and severe deflation in the advanced economies. Third, the impact on emerging economies has varied but is generally stronger than in the US and other advanced economies. US QE measures contributed to overheating in Brazil, China and other emerging economies in 2010 and 2011, but supported recovery in 2009 and 2012. The sign and size of QE effects differ across economies, implying that their costs and benefits are unevenly distributed.

Financial Crisis, US Unconventional Monetary Policy and International Spillovers

We study the impact of the US quantitative easing (QE) on both the emerging and advanced economies, estimating a global vector error-correction model (GVECM) and conducting counterfactual analyses. We focus on the effects of reductions in the US term and corporate spreads. First, US QE measures reducing the US corporate spread appear to be more important than lowering the US term spread. Second, US QE measures might have prevented episodes of prolonged recession and deflation in the advanced economies. Third, the estimated effects on the emerging economies have been diverse but often larger than those recorded in the US and other advanced economies. The heterogeneous effects from US QE measures indicate unevenly distributed benefits and costs.

The international impact of US unconventional monetary policy

Using a structural factor-augmented vector autoregression model and a large data set of daily time series, we study the impact of US unconventional monetary policy on British and German financial markets. Our findings indicate that a surprise US unconventional monetary policy easing leads to increased equity returns and lower government bond yields for both Germany and the United Kingdom. These effects then nearly completely dissipate after approximately 750 days.

Effects of U.S. Unconventional Monetary Policy and Implications for QE3

On August 20, 2012, the Federal Reserve announced a third round of quantitative easing (QE3), and interest is mounting as to the significance and influence of this policy. This study analyzes the effects of US unconventional monetary policies implemented during the global financial crisis, such as quantitative easing, Operation Twist, and the Federal Reserve’s policy commitment regarding the course of short-term interest rates. Moreover, it discusses the significance and implications for the QE3. Up to now, unconventional US monetary policy actions have improved the condition of US financial markets and lowered long-term Treasury yields, mortgage-backed security (MBS) rates, and corporate bond yields. The effects of the first round of quantitative easing (QE1) were the most influential, while the effects of the second round (QE2) were only about a third as potent as QE1. The effects of Operation Twist were minor compared to QE2. QE1 resulted in lowering yields on 10-year Treasury securities by 128.6 basis points (bp) and MBS yields by 136bp. QE2 caused 10-year Treasury yields to drop by 42.93bp and MBS yields by 37.25bp. The effects of the quantitative easing policy on the stock market and foreign exchange market are not statistically significant. The effects of QE3 are expected to be less than the previous two QE programs. Up to now, QE3 has lowered 10-year Treasury yields by 8bp and MBS yields by 32.3bp. The implementation of the QE policy in major advanced economies may cause so-called excess global liquidity problems. Global liquidity expansion may result in instability in foreign exchange and international commodity markets.