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Tinker, taper, QE, bye ? the effect of quantitative easing on financial flows to developing countries

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  • Lim, Jamus Jerome
  • Mohapatra, Sanket
  • Stocker, Marc

Abstract

This paper examines gross financial inflows to developing countries between 2000 and 2013, with a particular focus on the potential effects of quantitative easing policies in the United States and other high-income countries. The paper finds evidence for potential transmission of quantitative easing along observable liquidity, portfolio balancing, and confidence channels. Moreover, quantitative easing had an additional effect over and above these observable channels, which the paper argues cannot be attributed to either market expectations or changes in the structural relationships between inflows and observable fundamentals. The baseline estimates place the lower bound of the effect of quantitative easing at around 5 percent of gross inflows (for the average developing economy), which suggests that of the 62 percent increase in inflows during 2009-13 related to changing global monetary conditions, at least 13 percent of this was attributable to quantitative easing. The paper also finds evidence of heterogeneity among different types of flows; portfolio (especially bond) flows tend to be more sensitive than foreign direct investment to our measured effects from quantitative easing. Finally, the paper performs simulations that explore the potential effects of the withdrawal of quantitative easing on financial flows to developing countries.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6820.

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Date of creation: 01 Mar 2014
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Handle: RePEc:wbk:wbrwps:6820

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Keywords: Debt Markets; Emerging Markets; Economic Theory&Research; Currencies and Exchange Rates; Mutual Funds;

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  1. John C. Driscoll & Aart C. Kraay, 1998. "Consistent Covariance Matrix Estimation With Spatially Dependent Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 549-560, November.
  2. Baker, Malcolm & Wurgler, Jeffrey & Yuan, Yu, 2012. "Global, local, and contagious investor sentiment," Journal of Financial Economics, Elsevier, Elsevier, vol. 104(2), pages 272-287.
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Cited by:
  1. World Bank, 2014. "Global Economic Prospects, Volume 8, January 2014 : Coping with Policy Normalization in High-Income Countries," World Bank Publications, The World Bank, number 16572, August.
  2. Burns, Andrew & Kida, Mizuho & Lim, Jamus Jerome & Mohapatra, Sanket & Stocker, Marc, 2014. "Unconventional monetary policy normalization in high-income countries : implications for emerging market capital flows and crisis risks," Policy Research Working Paper Series 6830, The World Bank.

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