International Transmission Mechanism of Unconventional Monetary Policy

Abstract

The use of unconventional monetary policies by leading advanced country central banks has been accelerated especially after the global crisis of 2008-09 and become the new normal for the monetary policy. Among these policies, especially quantitative easing (QE) policy has taken the center stage and the literature concerning the effects of this policy on various economic indicators has exploded. The aim of this study is to contribute to the literature by analyzing the international transmission mechanism of unconventional monetary policy. In this context, two empirical studies are performed to analyze the spillover effects of QE policies on emerging market (EM) economies using panel data. The first study employs panel vector autoregression model and finds long run cointegration relationship between bond purchases and EM macro variables. QE implemented by Fed reduces sovereign bond yield and inflation, leads to exchange rate appreaciation and stimulates economic activity in EM economies. The second study use Augmented Mean Group (AMG) estimator that is robust to slope heterogeneity and cross section dependence. It examine the impact of QE carried out by Fed on local government bond yields in EM countries. Results show that both country specific variables such as central bank policy rate, inflation rate, budget deficit and global variables such as US bond yield and QE variables are significant determinants of domestic government bond interest rate in EM economies. The announcements regarding QE programs as well as actual bond purchases are found to lower EM bond interest rates.