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Quantitative Easing and Related Capital Flows into Brazil: measuring its effects and transmission channels through a rigorous counterfactual evaluation

  • João Barata R. B. Barroso
  • Luiz A. Pereira da Silva
  • Adriana Soares Sales

This paper investigates whether quantitative easing policies produces spillover effects from advanced economies into emerging markets affecting prices and asset markets, and, if so, how much of these effects is attributed to “excessive” capital inflows. We focus on the Brazilian economy and on quantitative easing (QE) policies adopted by the Federal Reserve. Our evaluation methodology is an extension of Pesaran and Smith (2012) and estimates ex-ante and ex-post policy effects over a grid of counterfactuals. We also provide a decomposition of the transmission channels of the policy effects, and test for their statistical significance. The decomposition method is novel and stems from a vector autoregressive model of the endogenous variables where the different channels are represented. Our results are consistent with the view that QE policies had a positive effect on growth but also had other significant spillover effects on the Brazilian economy. These effects were mostly transmitted through “excessive” capital inflows that led to exchange rate appreciation, stock market price increases and a credit boom. The effect on inflation was less robust, mitigated by currency appreciation and dependent on whether global activity reacts more strongly to quantitative easing.

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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps313.pdf
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Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 313.

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Date of creation: Jul 2013
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Handle: RePEc:bcb:wpaper:313
Contact details of provider: Web page: http://www.bcb.gov.br/?english

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  1. Hashem Pesaran, M. & Smith, Ron P., 2016. "Counterfactual analysis in macroeconometrics: An empirical investigation into the effects of quantitative easing," Research in Economics, Elsevier, vol. 70(2), pages 262-280.
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  10. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2011. "The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 43(2 (Fall)), pages 215-287.
  11. 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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  16. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2011. "The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy," NBER Working Papers 17555, National Bureau of Economic Research, Inc.
  17. Ben S. Bernanke & Mark Gertler & Mark Watson, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 91-157.
  18. D’Amico, Stefania & King, Thomas B., 2013. "Flow and stock effects of large-scale treasury purchases: Evidence on the importance of local supply," Journal of Financial Economics, Elsevier, vol. 108(2), pages 425-448.
  19. Robert Jarrow & Hao Li, 2014. "The impact of quantitative easing on the US term structure of interest rates," Review of Derivatives Research, Springer, vol. 17(3), pages 287-321, October.
  20. Joseph Gagnon & Matthew Raskin & Julie Remache & Brian Sack, 2011. "The Financial Market Effects of the Federal Reserve's Large-Scale Asset Purchases," International Journal of Central Banking, International Journal of Central Banking, vol. 7(1), pages 3-43, March.
  21. Jansen, W. Jos, 2003. "What do capital inflows do? Dissecting the transmission mechanism for Thailand, 1980-1996," Journal of Macroeconomics, Elsevier, vol. 25(4), pages 457-480, December.
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