Effects of Emerging Markets’ Asset Purchase Programs on Financial Markets

Most advanced economy central banks cut their policy rates and introduced asset purchase programs (APPs) to weather the impacts of the Covid-19 pandemic on their economies and financial systems. Similar to their advanced economy counterparts, a number of emerging market (EM) central banks also initiated APPs during the Covid-19 pandemic. In this paper, we analyze the effects of these EM APPs on financial market variables such as sovereign bond yields, nominal exchange rates vis-à-vis US dollar, and stock market indices by using a novel causal inference approach. We utilize the local projections (LP) methodology of Jordà (2005) and estimate the average treatment effect (ATE) of EM APPs by applying the augmented inverse probability weighting (AIPW) estimator that addresses the selection bias and endogeneity problems inherent in the statistical analysis of quantitative easing (QE) policies. Our empirical findings suggest that QE policies adopted by EM central banks played an instrumental role in lowering sovereign bond yields and supporting exchange rates and equity markets during Covid-19 pandemic. This suggests that QE policies may complement traditional monetary policies in EM countries especially during periods of elevated market stress and uncertainty.