Spillovers of US Unconventional Monetary Policy to Emerging and Advanced Countries

Abstract

This study investigates the international spillover effects of US unconventional monetary policy — frequently called large-scale asset purchases or quantitative easing (QE) — on advanced and emerging market economies, using VAR models with high-frequency daily data. Blinder (2010) argues that the QE measures primarily aim to reduce US interest rate spreads such as term premiums and risk premiums. Considering this argument, we use two interest rate spreads as indicators of the QE policy: the mortgage spread and term spread. Empirical findings, based on data from 20 emerging and 20 advanced countries, reveal that US unconventional monetary policies significantly affect financial conditions in both emerging and advanced countries by altering the risk-taking behavior of investors, which suggests that the risk-taking channel plays an important role in transmitting the effects of these policies to the rest of the world. The extent of these effects depends on the type of QE measures. QE measures such as purchases of private-sector securities that lower the US mortgage spread exert stronger and more significant spillover effects on international financial markets than do measures that reduce the US term spread. Furthermore, the estimated financial spillovers vary substantially across countries, as well as between and within the two country groups, emerging markets and advanced countries.

Keywords: US unconventional monetary policy, interest rate spreads, quantitative easing, emerging markets, spillovers, VAR

JEL Classification: E43, E44, E52, E65, F42