Quantitative Easing, Collateral Constraints, and Financial Spillovers

John Geanakoplos () and Haobin Wang ()
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John Geanakoplos: Cowles Foundation, Yale University, https://economics.yale.edu/people/faculty/john-geanakoplos
Haobin Wang: International Monetary Fund

No 2154, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: The steady application of Quantitative Easing (QE) has been followed by big and non-monotonic effects on international asset prices and international capital flows. These are difficult to explain in conventional models, but arise naturally in a model with collateral. This paper develops a general-equilibrium framework to explore QE's international transmission involving an advanced economy (AE) and an emerging market economy (EM) whose assets have less collateral capacity. Capital flows arise as a result of international sharing of scarce collateral. The crucial insight is that private AE agents adjust their portfolios in different ways in response to QE, conditional on whether they are (i) fully leveraged, (ii) partially leveraged or (iii) unleveraged. These portfolio shifts of international assets can diminish or even reverse the effectiveness of ever-larger QE interventions on asset prices. The model provides a simultaneous interpretation of several important stylized facts associated with QE.

Keywords: Quantitative easing; Collateral; Leverage; Financial spillovers; Emerging markets; Capital flows (search for similar items in EconPapers)
JEL-codes: D52 D53 E32 E44 E52 F34 F36 G01 G11 G12 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2018-12
New Economics Papers: this item is included in nep-ifn, nep-mac and nep-mon
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