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Effects of a Quantitative Easing Monetary Policy Exit Strategy on East Asian Currencies

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  • OGAWA Eiji
  • WANG Zhiqian

Abstract

The Federal Reserve Board (FRB) of the United States has decided to end its quantitative easing monetary policy as the global financial crisis is subsiding there. It is expected that it will raise the federal funds (FF) rate from almost zero in the near future. Large amounts of money which flowed from the United States into emerging market countries are beginning to flow back to it. As a result, the emerging market countries are beginning to face depreciation of their home currencies and drops in stock prices. Based on this situation in the global economy, we consider the effects of changes in the monetary policy, especially the effects of raising the interest rates in the United States on East Asian currencies in this paper. Specifically, we use data on interest rates as a monetary policy instrument to investigate how changes in the interest rates in the United States affect interest rates, exchange rates, and capital flows in the East Asian emerging market countries. Given the analytical results, we conclude that East Asian countries would face capital outflows that depreciate their home currencies while having upward pressure against their own interest rates if the FRB adopts a quantitative easing monetary policy exit strategy and raises the interest rates.

Suggested Citation

  • OGAWA Eiji & WANG Zhiqian, 2015. "Effects of a Quantitative Easing Monetary Policy Exit Strategy on East Asian Currencies," Discussion papers 15037, Research Institute of Economy, Trade and Industry (RIETI).
  • Handle: RePEc:eti:dpaper:15037
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    References listed on IDEAS

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    1. Mackowiak, Bartosz, 2007. "External shocks, U.S. monetary policy and macroeconomic fluctuations in emerging markets," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2512-2520, November.
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    4. OGAWA Eiji & Zhiqian WANG, 2013. "How Did the Global Financial Crisis Misalign East Asian Currencies?," Discussion papers 13096, Research Institute of Economy, Trade and Industry (RIETI).
    5. Jang, Kyungho & Ogaki, Masao, 2004. "The effects of monetary policy shocks on exchange rates: A structural vector error correction model approach," Journal of the Japanese and International Economies, Elsevier, vol. 18(1), pages 99-114, March.
    6. Lim, Jamus Jerome & Mohapatra, Sanket & Stocker, Marc, 2014. "Tinker, taper, QE, bye ? the effect of quantitative easing on financial flows to developing countries," Policy Research Working Paper Series 6820, The World Bank.
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    Cited by:

    1. Eiji Ogawa & Zhiqian Wang, 2016. "Effects of Quantitative Easing Monetary Policy Exit Strategy on East Asian Currencies," The Developing Economies, Institute of Developing Economies, vol. 54(1), pages 103-129, March.

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