Working Paper SerieS
NO 1557 / june 2013
On the international spillovers of US Quantitative Easing
Marcel Fratzscher, Marco Lo Duca and Roland Straub
"...Fourth and finally, there is a substantial degree of heterogeneity in the extent that countries’ capital flows and asset prices react to Fed QE measures. In particular EME policy makers may have tried to shield themselves from the described spillover effects, such as through interventions in foreign exchange markets – with FX reserves of many EMEs increasing dramatically between 2009 and 2011 – or by introducing capital controls. We find evidence that countries with better institutions and more active monetary policy have been affected less by Fed policies. By contrast, there is no evidence that having a pegged exchange rate regime or a less open capital account helped countries insulate themselves from QE policy spillovers, conversely, they might have amplified the pro-cyclical impact of Fed policies. This lends further credence to the hypothesis that the portfolio rebalancing effects of Fed QE policies are at least in part explained by risk and a flight-to-safety phenomenon.
The findings of the paper have a number of implications. They support the argument that US unconventional monetary policy measures have affected capital flows to EMEs in a procyclical manner, and have raised asset prices globally and weakened the US dollar. This suggests that there is indeed an important global dimension to and externalities from monetary policy decisions in advanced economies. However, the paper is mute on whether such externalities are overall positive or negative for other economies – as the potentially undesirable effects of these measure on the pro-cyclicality of EME capital flows need to be weighed against potential benefits such as e.g. through higher economic activity and a better financial market functioning in the global economy..."