Direct and Spillover Effects of Unconventional Monetary and Exchange Rate Policies
IMF Working Papers, March 13, 2017
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- Direct and Spillover Effects of Unconventional Monetary and Exchange Rate Policies
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Bibliographic details
- Authors: Joseph E. Gagnon, Tamim Bayoumi, Juan M. Londono, Christian Saborowski, Horacio Sapriza
- Published: March 13, 2017
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475586237.001
Summary and main findings
- The paper explores the effects of unconventional monetary and exchange rate policies.
- Official foreign asset purchases have large effects on current accounts that:
- diminish as capital mobility rises, and
- spill over to financially integrated countries.
- There is an additional effect through the stock of central bank assets.
- Domestic asset purchases affect current accounts only when capital mobility is low.
- Rising US bond yields drive foreign yields, stock prices, and depreciations, but less so on days of policy announcements.
- A theoretical model is developed that is broadly consistent with the empirical results.
Authors and publication
- By Joseph E. Gagnon, Tamim Bayoumi, Juan M. Londono, Christian Saborowski, Horacio Sapriza
- March 13, 2017
- IMF Working Papers, Working Paper No. 2017/056
- Pages: 52
- Issue: 056
- Volume: 2017
- DOI: https://doi.org/10.5089/9781475586237.001
- Stock No: WPIEA2017056
- ISBN: 9781475586237
- ISSN: 1018-5941
Key terms and subject coverage
- Subject: Balance of payments; Bond yields; Current account; Current account balance; Exchange rates; Financial institutions; Foreign exchange; Monetary policy; Unconventional monetary policies
- Keywords: announcement day; baseline current account parameter; Bond yields; capital mobility; Current account; current account balance; current account shock; Exchange rates; financial asset; foreign exchange intervention; Global; net official flows; QE coefficient; QE policy; QE variable; quantitative easing; Unconventional monetary policies; unconventional monetary policy; WP
Implications and interpretation
- Cross-border spillovers: Official foreign asset purchases affect not only the purchasing country’s current account but also financially integrated partners, implying significant international spillovers.
- Role of capital mobility: The effectiveness of both official foreign asset purchases and domestic asset purchases on current accounts is conditional on the degree of capital mobility; higher capital mobility reduces the direct impact of foreign asset purchases, and domestic purchases matter only when capital mobility is low.
- Transmission via central bank balance sheets: Changes in the stock of central bank assets provide an additional channel through which unconventional policies influence current accounts.
- US financial conditions as a driver: Movements in US bond yields are influential for foreign bond yields, equity prices, and exchange rates, with comparatively muted effects on announcement days.
IMF Working Paper — Direct and Spillover Effects of Unconventional Monetary and Exchange Rate Policies (Working Paper No. 2017/056; March 13, 2017).