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International spillovers of quantitative easing

Author

Listed:
  • Marcin Kolasa

    (Narodowy Bank Polski)

  • Grzegorz Wesołowski

    (Narodowy Bank Polski)

Abstract

This paper develops a two-country model with asset market segmentation to investigate the effects of quantitative easing implemented by the major central banks on a typical small open economy that follows independent monetary policy. The model is able to replicate the key empirical facts on emerging countries’ response to large scale asset purchases conducted abroad, including inflow of capital to local sovereign bond markets, an increase in international comovement of term premia, and change in the responsiveness of the exchange rate to interest rate differentials. According to our simulations, quantitative easing abroad boosts domestic demand in the small economy, but undermines its international competitiveness and depresses aggregate output, at least in the short run. This is in contrast to conventional monetary easing in the large economy, which has positive spillovers to output in other countries. We also find that limiting these spillovers might require policies that affect directly international capital flows, like imposing capital controls or mimicking quantitative easing abroad by purchasing local long-term bonds.

Suggested Citation

  • Marcin Kolasa & Grzegorz Wesołowski, 2019. "International spillovers of quantitative easing," NBP Working Papers 309, Narodowy Bank Polski, Economic Research Department.
  • Handle: RePEc:nbp:nbpmis:309
    Note: The paper benefited from comments received at the CEF conference in New York, EEA-ESEM meeting in Lisbon, ESCB Research Cluster 1 workshop in Madrid, SNDE conference in Tokyo, NBP-BoL-CEBRA-CEPR conference “International Spillovers” in Warsaw, WGEM EAGLE Network meeting in Frankfurt, and a seminar at the ECB.
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    Cited by:

    1. Nao Sudo & Masaki Tanaka, 2018. "Do Market Segmentation and Preferred Habitat Theories Hold in Japan? : Quantifying Stock and Flow Effects of Bond Purchases," Bank of Japan Working Paper Series 18-E-16, Bank of Japan.

    More about this item

    Keywords

    quantitative easing; international spillovers; bond market segmentation; term premia;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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