Working Paper: CEPR ID: DP9195
Authors: Marcel Fratzscher; Marco Lo Duca; Roland Straub
Abstract: The paper analyses the global spillovers of the Federal Reserve?s unconventional monetary policy measures since 2007. First, we find that Fed measures in the early phase of the crisis (QE1), but not since 2010 (QE2), were highly effective in lowering sovereign yields and raising equity markets in the US and globally across 65 countries. Yet Fed policies functioned in a pro-cyclical manner for capital flows to EMEs and a counter-cyclical way for the US, triggering a portfolio rebalancing across countries out of emerging markets (EMEs) into US equity and bond funds under QE1, and in the opposite direction under QE2. Second, the impact of Fed operations, such as Treasury and MBS purchases, on portfolio allocations and asset prices dwarfed those of Fed announcements, underlining the importance of the market repair and liquidity functions of Fed policies. Third, we find no evidence that FX or capital account policies helped countries shield themselves from these US policy spillovers, but rather that responses to Fed policies are related to country risk. The results thus illustrate how US monetary policy since 2007 has contributed to portfolio reallocation as well as a re-pricing of risk in global financial markets.
Keywords: capital flows; emerging markets; federal reserve; monetary policy; panel data; portfolio choice; quantitative easing; spillovers; united states
JEL Codes: E52; E58; F32; F34; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US quantitative easing (QE1) measures (E52) | lower long-term yields (E43) |
| US quantitative easing (QE1) measures (E52) | support equity prices in the US and globally (G10) |
| US quantitative easing (QE1) measures (E52) | portfolio rebalancing away from emerging markets (EMEs) into US equity and bond funds (G15) |
| US quantitative easing (QE2) measures (F33) | capital outflows from the US into EMEs (F32) |
| actual operations of the Fed (asset purchases) (E52) | substantial effects on portfolio decisions and asset prices (G11) |
| US QE measures (C54) | exacerbation of procyclicality of capital flows to EMEs (F65) |
| US QE measures (C54) | countercyclical function for US markets (E32) |