Central Bank Balance Sheet Policies and Spillovers to Emerging Markets

Manmohan Singh and Haobin Wang

No 2017/172, IMF Working Papers from International Monetary Fund

Abstract: We develop a theoretical model that shows that in the near future, the monetary policies of some key central banks in advanced economies (AEs) will have two dimensions—changes in short-term policy rates and balance sheet adjustments. This will affect emerging market economies (EMs), especially those with a pegged exchange rate, as these EMs primarily use a single monetary policy tool, i.e., the short-term policy rate. We show that changes in policy rates and balance sheet adjustments in AEs may differ in their respective financial spillovers to pegged EMs. Thus, it will be difficult for EMs to mitigate different types of spillovers with a single monetary policy tool. In that context, we use the model to show how EMs might use additional tools—capital controls and/or macro-prudential policy—to complement their monetary policy and financial stability toolkit. We also discuss how balance sheet adjustments that affect long-term interest rates may percolate to influence short-term interest rates via financial plumbing.

Keywords: WP; central bank; balance sheet; monetary policy; financial spillovers; collateral; RRP (reverse repo program); fed funds rate; General Collateral Finance (GCF rate); macro-prudential; capital control; quantitative easing; AE central bank; asset purchase; AE agent; excess reserves; policy rate; Financial statements; Central bank policy rate; Unconventional monetary policies; Capital controls; Global (search for similar items in EconPapers)
Pages: 27
Date: 2017-07-25
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Citations: View citations in EconPapers (3)

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