Working Paper: NBER ID: w23474
Authors: Anusha Chari; Karlye Dilts Stedman; Christian Lundblad
Abstract: This paper provides a novel perspective on the impact of U.S. unconventional monetary policy (UMP) on emerging market capital flows and asset prices. Using high-frequency Treasury futures data to identify U.S. monetary policy shocks, we find, through the lens of an affine term structure model, that these shocks represent revisions to both the expected path of short-term interest rates and required risk compensation. The risk compensation component is especially important during the UMP periods. Further, we find that these high-frequency policy shocks do exhibit sizable effects on U.S. holdings of emerging market assets and their valuations. We also document that the relative effects of U.S. monetary policy shocks are larger for emerging asset returns relative to physical capital flows, and they are largest for emerging equity markets relative to fixed income markets. Last, these effects are largest when the Federal Reserve is engaged in “tapering” its large-scale asset purchase program.
Keywords: unconventional monetary policy; capital flows; emerging markets; quantitative easing; tapering
JEL Codes: E52; E58; E65; F32; F42; G11; G12; G13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US unconventional monetary policy (UMP) shocks (E19) | emerging market asset valuations (G15) |
| US unconventional monetary policy (UMP) shocks (E49) | emerging market capital flows (F32) |
| US unconventional monetary policy (UMP) shocks (E49) | revisions in expected short-term interest rates (E43) |
| US unconventional monetary policy (UMP) shocks (E49) | changes in required risk compensation (G52) |
| US monetary policy shocks (E39) | emerging asset returns (G19) |
| US monetary policy shocks (E39) | physical capital flows (F21) |
| monetary policy shocks (E39) | equity market valuations (G12) |
| monetary policy shocks (E39) | debt market valuations (G19) |
| tapering periods (C41) | effects of monetary policy shocks on debt flows (E50) |
| monetary policy shocks (E39) | valuation changes for equity (G12) |
| monetary policy shocks (E39) | valuation changes for debt (G32) |