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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.

Suggested Citation

  • 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.
  • Handle: RePEc:wbk:wbrwps:6820
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    References listed on IDEAS

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    Cited by:

    1. Saroj Bhattarai & Arpita Chatterjee & Woong Yong Park, 2015. "Effects of US quantitative easing on emerging market economies," CAMA Working Papers 2015-47, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    2. Kristina Bluwstein & Fabio Canova, 2016. "Beggar-Thy-Neighbor? The International Effects of ECB Unconventional Monetary Policy Measures," International Journal of Central Banking, International Journal of Central Banking, vol. 12(3), pages 69-120, September.
    3. Park, Cyn-Young & Shin, Kwanho, 2018. "Global Banking Network and Regional Financial Contagion," ADB Economics Working Paper Series 546, Asian Development Bank.
    4. Burger, John D. & Warnock, Francis E. & Warnock, Veronica Cacdac, 2018. "Currency matters: Analyzing international bond portfolios," Journal of International Economics, Elsevier, vol. 114(C), pages 376-388.
    5. Meegan, Andrew & Corbet, Shaen & Larkin, Charles, 2018. "Financial market spillovers during the quantitative easing programmes of the global financial crisis (2007–2009) and the European debt crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 56(C), pages 128-148.
    6. Joanne GUO, 2015. "Quantitative Easingand U.S. Financial Asset Returns," Journal of Economics Bibliography, KSP Journals, vol. 2(3), pages 76-105, September.
    7. Espinosa-Torres, Juan Andrés & Gomez-Gonzalez, Jose Eduardo & Melo-Velandia, Luis Fernando & Moreno-Gutiérrez, José Fernando, 2016. "The international transmission of risk: Causal relations among developed and emerging countries’ term premia," Research in International Business and Finance, Elsevier, vol. 37(C), pages 646-654.
    8. Fonseca Felipe J. & Llamosas-Rosas Irving & Rangel González Erick, 2018. "Economic Liberalization and External Shocks. The Hypothesis of Convergence for the Mexican States, 1994-2015," Working Papers 2018-27, Banco de México.
    9. Peter Tillmann, "undated". "Tapering Talk on Twitter and the Transmission to Emerging Economies," GRU Working Paper Series GRU_2016_014, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    10. Anaya, Pablo & Hachula, Michael & Offermanns, Christian J., 2017. "Spillovers of U.S. unconventional monetary policy to emerging markets: The role of capital flows," Journal of International Money and Finance, Elsevier, vol. 73(PB), pages 275-295.
    11. Hernández Vega Marco A., 2017. "Portfolio Investment Response to U.S. Monetary Policy Announcements: An Event," Working Papers 2017-02, Banco de México.
    12. 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.
    13. MacDonald, Margaux, 2017. "International capital market frictions and spillovers from quantitative easing," Journal of International Money and Finance, Elsevier, vol. 70(C), pages 135-156.
    14. Thorsten Janus & Daniel Riera-Crichton, 2016. "Banking crises, external crises and gross capital flows," Globalization Institute Working Papers 273, Federal Reserve Bank of Dallas, revised 01 Jun 2016.
    15. World Bank, 2014. "Global Economic Prospects, January 2014," World Bank Publications, The World Bank, number 16572, December.
    16. Tillman, Peter, 2016. "Uncertainty about Federal Reserve Policy and Its Transmission to Emerging Economies: Evidence from Twitter," ADBI Working Papers 592, Asian Development Bank Institute.
    17. Marek Lubiński, 2015. "Efekty ponadgraniczne niekonwencjonalnej polityki monetarnej," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 6, pages 5-28.
    18. Adugna Olani, 2016. "Dynamic Capital Inflow Transmission Of Monetary Policy To Emerging Markets," Working Paper 1358, Economics Department, Queen's University.
    19. Sameer Khatiwada, 2017. "Quantitative Easing by the Fed and International Capital Flows," IHEID Working Papers 02-2017, Economics Section, The Graduate Institute of International Studies.
    20. Tillmann, Peter, 2016. "Unconventional monetary policy and the spillovers to emerging markets," Journal of International Money and Finance, Elsevier, vol. 66(C), pages 136-156.
    21. Rafael Cezar & Maéva Silvestrini, 2018. "Impact of the ECB Quantitative Easing on the French International Investment Position," Working papers 701, Banque de France.
    22. Annette Meinusch, 2017. "When the Fed sneezes - Spillovers from U.S. Monetary Policy to Emerging Markets," MAGKS Papers on Economics 201730, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

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    Keywords

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

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