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---

### Introduction and motivation
- Context:
  - The 2007–2009 US subprime mortgage crisis and the Great Recession prompted unconventional monetary policy, including the Federal Reserve’s large-scale asset purchase (LSAP) programs, and a rapid reduction of the federal funds rate target to near zero.
- Competing views on QE spillovers:
  - View 1: QE is designed for domestic contingencies; spillovers are unintended and small (Obstfeld-Rogoff (2002) perspective).
  - View 2: QE can depreciate domestic currencies, inflate risk-adjusted interest rate differentials, induce capital inflows, and create “competitive asset price inflation” risks (Rajan (2013); Taylor (2013)).
- Broad consensus: QE helped stabilize global financial markets during the crisis, but continuation carries risks and may have contributed to overheating in some emerging economies when recoveries diverged.

### Methodology: GVECM framework, identification, and variables
- Model and sample:
  - Global vector error correction model (GVECM) following Pesaran, Schuermann and Weiner (2004).
  - Estimated for 17 economies using monthly data spanning July 2007–February 2013.
- Country block endogenous variables (six domestic variables):
  - real GDP growth (⊿y)
  - CPI inflation rate (π)
  - a monetary policy indicator (mp)
  - credit growth (⊿bc)
  - equity price (sp)
  - foreign exchange pressure index (emp)
- US block specifics:
  - same domestic variables plus the VIX treated as endogenous and non-US real GDP growth as the foreign variable.
- Monetary policy indicators used:
  - US: term spread = 10-year minus three-month Treasury yield; corporate spread = BofA Merrill Lynch US corporate AAA bond yield minus effective federal funds rate.
  - United Kingdom and Japan: 10-year minus three-month government bond yields.
  - Euro area: 10-year government bond yield minus the main refinancing rate.
  - Emerging economies: growth rates in a broad monetary aggregate.
- Exchange rate pressure:
  - Weighted average of changes in nominal effective exchange rates and foreign exchange reserves (variant of Eichengreen, Rose and Wyplosz (1995)); a rise represents stronger appreciation pressure.
- Cross-country linkages:
  - Weighted averages of foreign variables where weights combine trade and BIS consolidated bank lending flow data; robustness checks show relative weight variation does not significantly change results.
- Identification scheme:
  - Recursive Cholesky ordering for the US VECM: real GDP growth, CPI inflation, monetary policy indicator, VIX index, equity price inflation, credit growth, foreign exchange pressure.
  - Assumption that the US affects but does not contemporaneously respond to other economies (Dees et al. (2007)).

### Data and estimation sample
- Sample period: July 2007 to February 2013.
- Economies covered:
  - Advanced: United States, euro area, Japan, United Kingdom.
  - Emerging Asia: China, Hong Kong SAR, India, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Thailand.
  - Latin America: Argentina, Brazil, Chile, Mexico.
- Two GVECMs estimated: one with the term spread as monetary policy indicator, one with the corporate spread.
- Noted limitation: confidence bands tend to be wide due to limited degrees of freedom and short time spans of many variables in the crisis-period sample.

### Key empirical findings (impulse responses and magnitudes)
- Shock sizes (one-standard-deviation):
  - US term spread: 14.2 basis points (negative innovation).
  - US corporate spread: 20.7 basis points (negative innovation).
- US domestic responses to a term spread shock (14.2 basis points cut):
  - US credit growth: statistically significant and persistent positive response beginning in six months; "a 14.2-basis-point cut has sustained credit growth of over 0.3 percentage points higher thereafter."
  - VIX: raises the VIX by over 6 percent initially, with statistically significant effects in the first three months after the shock.
  - CPI inflation and equity prices: lowered initially.
  - Output growth: typically small and not statistically significant.
- US domestic responses to a corporate spread shock (20.7 basis points cut):
  - Real GDP growth: "elevating real GDP growth by 0.2 percentage points throughout the three-year horizon."
  - Equity prices and CPI inflation: consistently boosted.
  - Credit growth: raises credit growth by less than 0.1 percentage points.
  - Exchange rate: "little impact on the exchange rate."
- Cross-border and regional patterns:
  - Responses to US corporate spread shocks are typically much larger than to term spread shocks.
  - A cut in the US corporate spread tends to promote persistently higher real GDP growth and inflation across advanced economies, emerging Asia and Latin America.
  - Cross-border equity-price channels are stronger when policy focuses on driving down the US corporate spread.
  - Exchange rate channel: lowering the US corporate spread leads to larger exchange rate appreciation pressure in Latin America and emerging Asia.
  - Within-region dispersion is sizeable; for emerging economies the range of impulse responses often includes zero.
- Comparative magnitude:
  - "US QE measures turn out to have a greater impact on economic and financial variables in many emerging economies than on the US economy."

### Country highlights and quantified spillovers
- Euro area (response to US shocks):
  - After a 14.2-basis-point cut in the US term spread: euro area term spread falls significantly and stays lower by over 10 basis points during most of the three-year horizon.
  - After a 20.7-basis-point cut in the US corporate spread:
    - Euro area credit growth: up by about 0.1 percentage points.
    - Euro area output growth: up by about 0.2 percentage points.
    - Euro area equity price inflation: rises by over 1 percentage point in four months.
    - Euro exchange rate: depreciates by about 0.5 percentage points.
- Brazil:
  - Money growth: rises in response to a US term spread shock; falls in response to a US corporate spread shock.
  - Equity prices: initial decline up to 2.4 percent upon a US term spread shock; rises consistently at 1.2 percent or more four months after a cut in the US corporate spread.
  - Credit and output growth: generally accelerate following a US easing, with stronger eventual impact from the US corporate spread shock.
  - Currency appreciation pressure: rises following a US easing, stronger from the corporate spread shock.
- China:
  - Following a US term spread cut:
    - Money growth: drops by 0.2 percentage points in the second month; credit growth drops by 0.3 percentage points in the second month.
    - Yuan: persistent depreciation pressures; pressure greater during first 20 months after a cut in the US corporate spread, significant and reaching 0.23 percentage points in one month.
    - Output/inflation: output response smaller; inflation response mostly negative.
  - Following a US corporate spread cut:
    - Money and credit growth: rise modestly for about six months before falling persistently thereafter.
    - Real GDP growth: "increases significantly and rapidly by 0.13 percentage points following a 20.7-basis-point cut in the US corporate spread, despite an initial drop."
    - CPI inflation: "rises persistently by about 0.16 percentage points."
  - Counterfactual aggregate impacts (end of 2012):
    - Real GDP growth: boosted by 2.5 (jump) to 5.5 (constant) percentage points.
    - Money and credit growth cumulatively: estimated to be lower by up to 8 and 15 percentage points, respectively, compared to jump and constant counterfactuals.
  - Timing interpretation: spillovers contributed to China’s overheating when output growth exceeded 9 percent in 2010–11 and inflation was over 5 percent in 2011.

### Counterfactual analysis: scenarios, setup, and main quantitative results
- Purpose: evaluate domestic and global impact of US QE measures and assess separate impacts of LSAP1, LSAP2, MEP and LSAP3 using conditional one-step-ahead GVECM forecasts given counterfactual US corporate spread paths.
- Two primary counterfactual scenarios:
  - Constant scenario: the US corporate spread remains constant within each period of the QE program at the level seen immediately before the implementation of each US asset purchase program (LSAP1, LSAP2, MEP and LSAP3).
  - Jump scenario: the US corporate spread jumps by 200 basis points at the start of each QE program, thereafter it stays above the actual values during the entire program.
  - An "increasing scenario" (rise by 10 basis points each month) was examined with similar results; only constant and jump scenarios are presented.
- Key counterfactual findings for the US:
  - Without QE (especially purchases that lowered the US corporate spread), the US economy would have remained mired in a recession with deflation.
  - The jump scenario suggests asset purchases may have supported higher real GDP growth by about 8 percentage points, and inflation by over 5 percentage points.
  - Equity prices would have been much lower without the QE measures.
  - The constant scenario indicates even greater effects than the jump scenario.
  - The jump scenario points to appreciation pressures on the US dollar during much of program implementation, but cumulatively the programs exerted sizeable depreciation pressures.
  - The counterfactual exercise indicates that the programs actually slowed credit growth.
- Program-specific note:
  - During LSAP1 the US corporate spread drifted back up midway through the program to levels higher than when LSAP1 began, and then kept climbing during LSAP2 — suggesting LSAP1 and LSAP2 may have had only transitory impacts on the US corporate spread or that other adverse shocks diluted the programs’ effects.

### Policy implications, interpretation, and coordination considerations
- QE effectiveness and mechanisms:
  - QE measures reduced longer-term Treasury yields and corporate borrowing costs via direct purchases and portfolio rebalancing, consistent with Blinder (2010).
  - Term and corporate spreads remain informative at the zero lower bound and capture the immediate objectives and impact of QE.
  - Evidence suggests targeting corporate borrowing costs (private asset purchases) can be more effective than indirectly driving down such costs via Treasury purchases; LSAP1 (which included private asset purchases) had a larger impact than later asset purchases.
- Distributional and timing considerations:
  - The distribution of QE costs and benefits is uneven across countries and over time; whether a country perceives QE spillovers as beneficial or harmful depends on its cyclical position when QE is adopted.
  - Examples: US QE supported recovery in emerging economies in 2009 and 2012 but contributed to overheating in parts of 2010–2011.
- Coordination dilemma:
  - Uncertainty and disagreement about cross-border effects are major obstacles to policy coordination (Ostry and Ghosh (2013)).
  - The paper notes limited case for formal central bank cooperation but stresses the need for constant dialogue and readiness for coordinated action in exceptional circumstances.
- Caution on inference:
  - Large confidence bands reflect elevated estimation uncertainty; results should be interpreted with caution given the short sample and crisis conditions.

### Robustness and model/data notes
- Robustness checks:
  - Results robust to different model specifications and variable definitions, including:
    - Use of base money growth instead of broad money growth.
    - Use of the federal funds rate instead of the three-month US Treasury bill rate to calculate the US term spread.
    - Use of the three-month US Treasury bill rate instead of the federal funds rate to calculate the US corporate spread.
  - Results robust to alternative orderings of the variables in the identification scheme.
- Unit-root testing:
  - ADF and WSDF tests used; at the 5 percent significance level most domestic variables tested I(1), with exceptions noted for specific countries and variables.
- Data sources and variable definitions highlighted in the analysis (selected):
  - US corporate spread: BofA Merrill Lynch US Corporate AAA minus the federal funds rate.
  - Term spread: 10-year US Treasury bond yield minus 3-month US Treasury bill rate (with adjustments for euro area).
  - VIX: CBOE Volatility Index; in natural logarithm.
  - Foreign exchange pressure index (emp): constructed from nominal effective exchange rate (E) and foreign reserves (R).

*Source: _wp1585*

### References ________________________________________________________________29

### References

### Introduction and motivation
- The 2007–2009 US subprime mortgage crisis and the Great Recession prompted unconventional monetary policy, including the Federal Reserve’s large-scale asset purchase (LSAP) programs, and a rapid reduction of the federal funds rate target to near zero.
- Two contrasting views on QE spillovers:
  - View 1: QE is designed for domestic contingencies; spillovers are unintended and small gains from international coordination (Obstfeld-Rogoff (2002) perspective).
  - View 2: QE can depreciate domestic currencies, inflate risk-adjusted interest rate differentials, induce capital inflows, and create “competitive asset price inflation” risks (Rajan (2013); Taylor (2013)).
- General consensus: QE helped stabilize global financial markets during the crisis, but continuation carries risks and may have contributed to overheating in some emerging economies when recoveries diverged.

### Methodology: GVECM framework and variables
- Model: Global vector error correction model (GVECM) following Pesaran, Schuermann and Weiner (2004), estimated for 17 economies using monthly data spanning July 2007–February 2013.
- Country block endogenous variables (six domestic variables):
  - real GDP growth (⊿y)
  - CPI inflation rate (π)
  - a monetary policy indicator (mp)
  - credit growth (⊿bc)
  - equity price (sp)
  - foreign exchange pressure index (emp)
- US block:
  - same domestic variables as other countries, plus the VIX treated as endogenous and non-US real GDP growth as the foreign variable.
- Monetary policy indicators used:
  - US: 10-year minus three-month Treasury yield (“term spread”) and BofA Merrill Lynch US corporate AAA bond yield minus effective federal funds rate (“corporate spread”).
  - United Kingdom and Japan: 10-year minus three-month government bond yields.
  - Euro area: 10-year government bond yield minus the main refinancing rate.
  - Emerging economies: growth rates in a broad monetary aggregate.
- Exchange rate pressure: weighted average of changes in nominal effective exchange rates and foreign exchange reserves (variant of Eichengreen, Rose and Wyplosz (1995)).
- Cross-country linkages: weighted averages of foreign variables where weights combine trade and BIS consolidated bank lending flow data; robustness analysis indicates relative weight variation does not significantly change results.
- Credit data: new BIS total credit to the non-financial private sector series covering on average 45 years for 40 economies.
- Identification: recursive Cholesky scheme for the US VECM with ordering: real GDP growth, CPI inflation, monetary policy indicator, VIX index, equity price inflation, credit growth, foreign exchange pressure; assumption that the US affects but does not contemporaneously respond to other economies (Dees et al. (2007)).

### Data and estimation sample
- Sample period: July 2007 to February 2013 (the crisis period when the Federal Reserve implemented unconventional policies).
- Economies covered: four advanced economies (United States, euro area, Japan, United Kingdom); nine emerging Asian economies (China, Hong Kong SAR, India, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Thailand); four Latin American economies (Argentina, Brazil, Chile, Mexico).
- Two GVECMs estimated: one with term spread as the monetary policy indicator, the other with the corporate spread.
- Noted limitation: confidence bands tend to be wide due to the limited degrees of freedom and short time spans of many variables in the crisis-period sample.

### Key empirical findings
- Impulse responses estimated for US shocks:
  - One-standard-deviation cut in the US term spread: 14.2 basis points.
  - One-standard-deviation reduction in the US corporate spread: 20.7 basis points.
- Main results:
  - Reductions in the US corporate spread—and to a lesser extent, the US term spread—had sizeable effects on financial conditions and economic activity domestically and globally.
  - Counterfactual analysis (based on impulse responses) indicates that US QE programs, especially LSAP1, were important counter-cyclical measures and apparently prevented prolonged US and other advanced-economy recessions and deflation.
  - Effects on emerging economies were generally larger and more diverse than those on advanced economies:
    - US QE measures contributed to overheating in Brazil, China and some other emerging economies in 2010 and 2011.
    - US QE measures supported recovery in these emerging economies in 2009 and 2012.
  - Cross-border spillovers varied across economies and over time; the strength of effects depends on both the receiving economy’s reactions and its economic/financial structure, policy framework, and exchange rate arrangement.

### Policy implications and interpretation
- QE effectiveness and spillovers:
  - QE measures reduced longer-term Treasury yields and corporate borrowing costs via direct purchases and portfolio rebalancing, consistent with Blinder (2010).
  - Term and corporate spreads remain informative at the zero lower bound (ZLB) and capture the immediate objectives and impact of QE.
- Coordination dilemma:
  - Uncertainties and disagreement about cross-border effects of QE are major obstacles to policy coordination (Ostry and Ghosh (2013)).
  - The distribution of QE costs and benefits is uneven across countries and over time; whether a country perceives QE’s spillovers as beneficial or harmful depends on its cyclical position when QE is adopted.
- Caution on inference:
  - Large confidence bands reflect elevated estimation uncertainty; results should be interpreted with caution given the short sample and crisis conditions.
  - Robustness checks include alternative orderings and varying trade/financial weight compositions for foreign variables.

*Italic: Source: _wp1585 - References ________________________________________________________________29*

### 25.      Several interesting results emerge. First, US credit growth begins to have a

### _wp1585 - 25.      Several interesting results emerge. First, US credit growth begins to have a 

### Findings: US domestic responses to term and corporate spread shocks
- Term spread shock (one-standard-deviation = 14.2 basis points negative innovation):
  - US credit growth: statistically significant and persistent positive response beginning in six months’ time; "a 14.2-basis-point cut has sustained credit growth of over 0.3 percentage points higher thereafter."
  - US output growth: typically small and not statistically significant effects.
  - CPI inflation: lowered initially.
  - Equity prices: lowered initially.
  - VIX: raises the VIX by over 6 percent initially, with statistically significant effects in the first three months after the shock.
  - Market interpretation: "a decline in the US term spread may be perceived negatively by markets, for example as a harbinger of less encouraging prospects."

- Corporate spread shock (one-standard-deviation = 20.7 basis points negative innovation):
  - Real GDP growth: strong, positive and statistically significant impact; "elevating real GDP growth by 0.2 percentage points throughout the three-year horizon."
  - Equity prices: consistently boosted.
  - CPI inflation: consistently boosted.
  - Credit growth: raises credit growth by less than 0.1 percentage points.
  - Exchange rate: "little impact on the exchange rate."

- Policy implication:
  - "It apparently pays off to take actions that target corporate borrowing costs rather than indirectly driving down such costs by purchasing Treasury securities to lower long-term sovereign yields."
  - Evidence corroborates that LSAP1 (which included private asset purchases) had a larger impact than later asset purchases.

### Cross-border monetary policy spillovers: regional and cross-economy patterns
- Method:
  - Weighted regional average impulse responses to a one-standard-deviation shock to US term (14.2 basis points) and corporate (20.7 basis points) spreads for other major advanced economies, emerging Asia and Latin America.
  - Weights: real GDP shares based on average real GDP between 1995 and 2013.
  - Averaging caveat: "The averaging masks sizeable cross-economy differences, and the 'averaged' confidence bands are no longer valid for the average estimates."

- General regional findings:
  - Responses vary by whether the shock is a term or corporate spread shock; responses to a US corporate spread shock are typically much larger.
  - A cut in the US corporate spread tends to promote persistently higher real GDP growth and inflation in all three regions, with greater impact in a number of Latin American and emerging Asian economies.
  - Cross-border confidence channels: stronger responses in equity prices when policy focuses on driving down the US corporate spread.
  - Exchange rate channel: lowering the US corporate spread leads to typically larger exchange rate appreciation pressure in Latin America and emerging Asia.

- Monetary policy responses:
  - Advanced economies: monetary policy loosens in response to a US term or corporate spread shock.
  - Emerging economies: respond differently across economies; "besides Argentina, Malaysia and Singapore, monetary policy in most emerging economies tend to loosen in response to a cut in the US corporate or term spread."
  - More emerging economies tend to loosen in response to a cut in the US corporate spread.

- Exchange rate responses:
  - Advanced economies: currencies on average depreciate in response to a US term spread shock.
  - Latin America: appreciation pressures tend to rise following a cut in the US term or corporate spread and are larger.
  - Emerging Asia: some currencies depreciate while others appreciate.

- Dispersion and significance:
  - Within-region dispersion is sizeable; for emerging economies the range of impulse response estimates often includes zero.
  - Dispersion generally greater for responses to a US corporate than term spread shock, except for equity price and foreign exchange pressure.
  - Median estimates for output growth, credit growth, equity price and foreign exchange pressure tend to have the expected sign, especially for a reduction in the US corporate spread.
  - For equity prices: median responses are positive for a cut in the US corporate spread; median responses to a reduction in the US term spread are negative (initial drop larger than later persistent rise).

### Country highlights: euro area, Brazil, China
- Euro area:
  - Following a 14.2-basis-point cut in the US term spread:
    - Euro area term spread falls significantly and stays lower by over 10 basis points during most of the three-year horizon (almost one-to-one response).
  - Following a 20.7-basis-point cut in the US corporate spread:
    - Euro area credit growth: up by about 0.1 percentage points.
    - Euro area output growth: up by about 0.2 percentage points.
    - Euro area equity price inflation: rises by over 1 percentage point in four months.
    - Euro exchange rate: depreciates by about 0.5 percentage points when US corporate spread is reduced.
    - Lowering the US term spread has little effect on the euro exchange rate.

- Brazil:
  - Money growth: rises in response to a US term spread shock; falls in response to a US corporate spread shock.
  - Equity price: initial decline up to 2.4 percent upon a US term spread shock, then rises slightly and stays almost unchanged; rises consistently at 1.2 percent or more four months after a cut in the US corporate spread.
  - Credit and output growth: generally accelerate following a US easing, with stronger eventual impact from the US corporate spread shock.
  - Currency appreciation pressure: rises following a US easing, stronger from the corporate spread shock.

- China:
  - Following a US term spread cut:
    - Money growth: drops by 0.2 percentage points in the second month, then slightly positive before a persistent decline.
    - Credit growth: drops by 0.3 percentage points in the second month.
    - Yuan: persistent depreciation pressures; pressure greater during first 20 months after a cut in the US corporate spread, significant and reaching 0.23 percentage points in one month.
    - Output/inflation: output response smaller; inflation response mostly negative.
  - Following a US corporate spread cut:
    - Money and credit growth: rise modestly for about six months before falling persistently thereafter.
    - Real GDP growth: "increases significantly and rapidly by 0.13 percentage points following a 20.7-basis-point cut in the US corporate spread, despite an initial drop."
    - CPI inflation: "rises persistently by about 0.16 percentage points."
    - Equity prices: rise following a US corporate spread shock and generally fall after a US term spread shock.
  - Net implication: "reducing the US corporate spread is more accommodative overall for the Chinese economy, even though China tends to lean against it with monetary and credit policies."

### Comparative magnitude of spillovers and interpretation
- Finding: "US QE measures turn out to have a greater impact on economic and financial variables in many emerging economies than on the US economy."
- Supporting interpretation: flows generated by US unconventional policies "could swamp the more illiquid receiving country markets, thus creating large price and volume effects."

### Robustness checks
- Results robust to:
  - Different model specifications and variable definitions, including:
    - Use of base money growth instead of broad money growth.
    - Use of the federal funds rate instead of the three-month US Treasury bill rate to calculate the US term spread.
    - Use of the three-month US Treasury bill rate instead of the federal funds rate to calculate the US corporate spread.
  - Alternative orderings of the variables in the identification scheme for the shocks.

### GVECM-based counterfactual analysis: setup and scenarios
- Purpose: evaluate domestic and global impact of US QE measures; assess separate impacts of LSAP1, LSAP2, MEP and LSAP3.
- Method: conditional one-step-ahead forecasts from estimated GVECM given predetermined counterfactual paths for the US corporate spread.
- Two counterfactual scenarios:
  1. Constant scenario: "the US corporate spread remains constant within each period of the QE program, at the level seen immediately before the implementation of each US asset purchase program, namely LSAP1, LSAP2, MEP and LSAP3."
  2. Jump scenario: "the US corporate spread jumps by 200 basis points at the start of each QE program, thereafter it stays above the actual values during the entire program."
- Additional note: an "increasing scenario" (rise by 10 basis points each month) was examined with similar results; only constant and jump scenarios presented.
- Illustration: Figure 4 shows actual and both counterfactual paths for the US corporate spread; grey areas indicate LSAP1, LSAP2 and MEP implementation periods; black lines actual values; red lines jump scenario (+200 basis points); blue lines constant-level scenario.

### Counterfactual analysis results: domestic US impact
- Main conclusion: "US QE measures had sizeable domestic effects, and such effects varied substantially depending on whether the measures led to a substantial fall in the US corporate spread."
- If asset purchases kept the US corporate spread at a low level relative to the baseline, "such actions appeared to have contributed to stronger US economic recovery."

*Source: Authors’ calculations based on an estimated GVECM, as presented in the supplied IMF working paper excerpt.*

### 46.      Figure 4 presents the dynamics of US economic and financial variables under the

### _wp1585 - 46.      Figure 4 presents the dynamics of US economic and financial variables under the

### Counterfactual analysis of US QE (constant vs. jump scenarios)
- Two scenarios for the US corporate spread are analyzed: the “jump” scenario and the “constant” scenario (see notes describing a 200 basis point jump and pre-program level).
- Key findings for the US:
  - Without QE, especially purchases of agency MBS and agency debt that lowered the US corporate spread, the US economy would have remained mired in a recession with deflation.
  - The “jump” scenario suggests asset purchases may have supported higher real GDP growth by about 8 percentage points, and inflation by over 5 percentage points.
  - Equity prices would have been much lower without the QE measures.
  - The “constant” scenario indicates even greater effects than the “jump” scenario.
  - The “jump” scenario points to appreciation pressures on the US dollar during much of the implementation of each program, but cumulatively the programs exerted sizeable depreciation pressures.
  - The counterfactual exercise indicates that the programs actually slowed credit growth.
- Note on LSAP programs: during LSAP1 the US corporate spread drifted back up midway through the program to levels higher than when LSAP1 began, and then kept climbing during LSAP2 — suggesting LSAP1 and LSAP2 may have had only transitory impacts on the US corporate spread or that other adverse shocks diluted the programs’ effects.

### Spillovers from reductions in the US corporate spread — overview
- Cross-border spillover effects from US QE policies that reduce the US corporate spread are sizeable and diverse across regions and variables.
- Effects depend on recipient country characteristics, policy responses, and exchange rate regimes.
- QE measures that reduce the US corporate spread:
  - Delivered sizeable stimulus to US output growth and equity markets.
  - Led to substantial currency depreciation in the US.
  - Had sizeable and widespread effects on global equity prices.
  - Tend to have a greater impact on many emerging economies than on the US economy.

### Euro area spillovers
- Counterfactual estimates (Graph 3.2.1 referenced):
  - The lower US corporate spread is estimated to have supported euro area credit and output growth.
  - Impact range: 3 and 8 percentage points (jump scenario) to 7 and 16 percentage points (constant scenario) — respectively for credit and output growth.
  - Significant boost to equity prices.
- Graph notes:
  - Red lines: jump scenario where the US corporate spread jumps by 200 basis points and stays 200 basis points above actual levels throughout the respective QE program.
  - Blue lines: scenario where the US corporate spread stays equal to the actual level observed just before the QE program.
  - A rise in the foreign exchange pressure index represents stronger appreciation pressure.

### Brazil spillovers
- Lowering the US corporate spread stimulated Brazil’s output growth while having little impact on inflation.
- Interpretation of Brazilian episodes:
  - LSAP1 arguably helped Brazil recover rapidly from the 2009 recession.
  - MEP and LSAP3 might have helped Brazil avoid a possible recession in 2012.
  - LSAP2 began when Brazil’s output growth reached a peak of almost 8 percent and therefore might be interpreted as having contributed to Brazil’s overheating at the time.
- These episodes highlight that the perception of monetary policy spillovers may be influenced by the receiving country’s cyclical position.
- Figure notes (Brazil):
  - Same scenario definitions as for euro area (200 basis points jump vs. pre-program level).
  - A rise in the foreign exchange pressure index represents stronger appreciation pressure.

### China spillovers
- US QE programs had an expansionary spillover to China, but effects were weaker than for Brazil:
  - China’s real GDP growth boosted by 2.5 (jump) to 5.5 (constant) percentage points by the end of 2012.
- Offsetting factors in China:
  - Tighter Chinese monetary and credit conditions accompanied the lowering of the US corporate spread.
  - Cumulatively, money and credit growth were estimated to be lower by up to 8 and 15 percentage points, respectively, compared to the jump and constant counterfactuals.
  - Currency appreciation pressures rose moderately relative to the counterfactuals since mid-2010.
- Timing implications:
  - Spillovers contributed to China’s overheating when China’s output growth exceeded 9 percent in 2010–11, and inflation was over 5 percent in 2011.

### Aggregate conclusions from counterfactual exercises
- US QE measures that reduced the corporate spread:
  - Helped prevent the US economy from sliding into a prolonged recession with severe deflation (if the counterfactuals are reasonable approximations).
  - Supported advanced economies and the recovery in emerging economies in 2009 and 2012.
  - Contributed to overheating in emerging economies in 2010 and 2011.
- Cross-border impacts vary by country and depend on recipient policy responses:
  - Example: China tightened monetary and credit conditions, partially offsetting expansionary spillovers.
  - Example: Brazil experienced sizeable credit expansion that amplified overall expansionary effects.
- Policy and coordination considerations:
  - Cross-border monetary policy spillovers can be important sources of macroeconomic and financial instability.
  - Raises questions about whether central banks should more explicitly consider unintended consequences on others and how to promote stability.
  - The paper notes limited case for formal central bank cooperation but stresses the need for constant dialogue and readiness for coordinated action in exceptional circumstances.

### Model structure and data notes (GVECM and variables)
- Model: a Global Vector Error-Correction Model (GVECM) links domestic variables to weighted foreign variables; weights capture spillovers and are time-varying based on trade and capital flow measures.
- Scenario definitions (figure notes):
  - Jump scenario: US corporate spread jumps by 200 basis points and stays 200 basis points above actual levels throughout the respective QE program.
  - Constant scenario: US corporate spread stays equal to the actual level observed just before the QE program.
- Data and variable definitions (selected):
  - US corporate spread: BofA Merrill Lynch US Corporate AAA minus the federal funds rate.
  - Term spread: Difference between 10-year US Treasury bond yield and 3-month US Treasury bill rate (for euro area, main refinancing rate used instead of 3-month government bond yield due to data limitations).
  - VIX: CBOE Volatility Index; in natural logarithm.
  - Foreign exchange pressure index (emp): constructed from nominal effective exchange rate (E) and foreign reserves (R) as described; a rise represents stronger appreciation pressure.
  - Several variables are measured in percentage points, natural logarithms, or per cent as specified for figures.
- Unit root testing:
  - Augmented Dickey-Fuller (ADF) and weighted-symmetric Dickey-Fuller (WSDF) tests used.
  - At the 5 percent significance level, most domestic variables tested I(1), with exceptions noted (e.g., real GDP growth in Hong Kong, Thailand and the United Kingdom; CPI inflation in Chile, China and the Philippines; foreign exchange pressure indices of Argentina and the euro area; equity price inflation in Hong Kong, Indonesia and South Korea; monetary aggregates in India; foreign exchange pressure index of India and monetary aggregates in Singapore).
  - Most foreign variables and the global factor VIX tested I(1).

*Source: Authors’ calculations and counterfactual analysis presented in the supplied content.*

### REFERENCES

### REFERENCES

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*Source: _wp1585 - REFERENCES*

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