International spillovers of quantitative easing

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.

Unintended Consequences of U. S. Monetary Policy Shocks: Dutch Disease and Capital Flow Measures in Emerging Markets and Developing Economies

“…These results are in line withKolasa and Wesolowski (2020), which finds that unconventional monetary policy in the United States led to negative output spillovers in emerging markets.©International Monetary Fund. Not for Redistribution…”

Quantifying Stock and Flow Effects of QE

“…There are some works that study the effects of government bond purchases on the term premium and economic activities, using a calibrated DSGE model. These include Alpanda and Kabaca (2015), Burlon et al (2016), Harrison (2012, 2017, and Kolasa and Wesołowskiz (2020). Katagiri and Takahashi (2017) estimate a small open DSGE model that is built upon CCF (2012) using the data of Japan and the United States, focusing on how the exogenous changes in term premium is translated to the economy.…”

Winners and Losers from Sovereign Debt Inflows

“…We show that the effect of sovereign debt inflows differs across sectors, in line with the evidence in Benigno et al (2015) that episodes of large inflows are followed by a reallocation of labor and investment from tradable to non-tradable sectors. Also, related to ours is the study by Kolasa and Wesolowski (2020), which develops a two-country open-economy model with segmented markets and shows that quantitative easing in developed countries can induce sovereign debt inflows in emerging countries which boost domestic demand but dampen international competitiveness.…”