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A global monetary tsunami? On the spillovers of US Quantitative Easing

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Author Info

  • Fratzscher, Marcel
  • Lo Duca, Marco
  • Straub, Roland

Abstract

The paper analyses the global spillovers of the Federal Reserve’s unconventional monetary policy measures since 2007. First, we find that Fed measures in the early phase of the crisis (QE1), but not since 2010 (QE2), were highly effective in lowering sovereign yields and raising equity markets in the US and globally across 65 countries. Yet Fed policies functioned in a pro-cyclical manner for capital flows to EMEs and a counter-cyclical way for the US, triggering a portfolio rebalancing across countries out of emerging markets (EMEs) into US equity and bond funds under QE1, and in the opposite direction under QE2. Second, the impact of Fed operations, such as Treasury and MBS purchases, on portfolio allocations and asset prices dwarfed those of Fed announcements, underlining the importance of the market repair and liquidity functions of Fed policies. Third, we find no evidence that FX or capital account policies helped countries shield themselves from these US policy spillovers, but rather that responses to Fed policies are related to country risk. The results thus illustrate how US monetary policy since 2007 has contributed to portfolio reallocation as well as a re-pricing of risk in global financial markets.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9195.

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Date of creation: Oct 2012
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Handle: RePEc:cpr:ceprdp:9195

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Related research

Keywords: capital flows; emerging markets; Federal Reserve; monetary policy; panel data; portfolio choice; quantitative easing; spillovers; United States;

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References

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  1. Andrew K. Rose & Tomasz Wieladek, 2011. "Financial Protectionism: the First Tests," NBER Working Papers 17073, National Bureau of Economic Research, Inc.
  2. Marcel Fratzscher, 2011. "Capital Flows, Push versus Pull Factors and the Global Financial Crisis," NBER Working Papers 17357, National Bureau of Economic Research, Inc.
  3. Hancock, Diana & Passmore, Wayne, 2011. "Did the Federal Reserve's MBS purchase program lower mortgage rates?," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 498-514.
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  15. Fawley, Brett W. & Neely, Christopher J., 2013. "Four stories of quantitative easing," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 51-88.
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  17. Michael A. S. Joyce & Ana Lasaosa & Ibrahim Stevens & Matthew Tong, 2011. "The Financial Market Impact of Quantitative Easing in the United Kingdom," International Journal of Central Banking, International Journal of Central Banking, vol. 7(3), pages 113-161, September.
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  20. Claudio Raddatz ; & Sergio L. Schmukler, 2012. "On the International Transmission of Shocks: Micro – Evidence From Mutual Fund Portfolios," Working Papers Central Bank of Chile 668, Central Bank of Chile.
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Cited by:
  1. Bowman, David & Londono, Juan M. & Sapriza, Horacio, 2014. "U.S. Unconventional Monetary Policy and Transmission to Emerging Market Economies," International Finance Discussion Papers 1109, Board of Governors of the Federal Reserve System (U.S.).
  2. Dong He & Robert N McCauley, 2013. "Transmitting Global Liquidity to East Asia: Policy Rates, Bond Yields, Currencies and Dollar Credit," Working Papers 152013, Hong Kong Institute for Monetary Research.
  3. Kerstin Bernoth & Marcel Fratzscher & Philipp König, 2014. "Schwache Preisentwicklung und Deflationsgefahr im Euroraum: Grenzen der konventionellen Geldpolitik," DIW Wochenbericht, DIW Berlin, German Institute for Economic Research, vol. 81(12), pages 235-249.

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