What Are The Impact Of The Unconventional Monetary Policy

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Following the global financial crisis, the Federal Reserve lowered the federal funds rate target rapidly to near zero, and engaged in two types of unconventional monetary policies to provide further stimulus: forward guidance about future interest rates and large-scale asset purchase program. These measures were directed toward improving financial conditions and therefore spurring economic activity. However, as the central bank of the world’s largest economy, the Federal Reserve’s policy decisions had considerable spillover effect on emerging market economies, which is transmitted mainly through international capital flow.
The unconventional monetary policies in the U.S. lowered yields on the long-term U.S. Treasury bonds …show more content…

UMP and capital flows to five major emerging national economies: Brazil, Russia, India, China, and South Africa. First, how much does U.S. UMP shock spur capital flows into these EMEs? Second, does U.S. UMP affect financial and real variables in EMEs through capital flows? Third, what other factors influence the level of capital flow to EMEs? Fourth, what policy implications does it have on EMEs?
Our research is related to studies that analyze the spillovers from U.S. monetary policy on international cash flow. Moore et al. (2013) looks at the effect of U.S. QE on local currency bond markets by using panel model. He found that a drop in the U.S. Treasury bond yield by 10 percentage points leads to a 0.4 percentage point increase in the foreign ownership share of emerging market debt and a significant reduction in government bond yields. Similar studies are made by Chen et al (2011), Neely (2010), and Fratzscher (2013) in which they use event analysis when assessing the impact of U.S. QE on several advanced economies. By analyzing the response of high-frequency financial variables to the Federal Reserve’s announcements of policy changes within a very narrow time frame, they show that U.S. monetary policy shocks significantly affect capital flows and asset price variation in emerging market economies. They also conclude that emerging market economies with stronger fundamentals receive smaller

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