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On the global Impact of risk-off shocks and policy-put frameworks

Ricardo Caballero () and Gunes Kamber

No 772, BIS Working Papers from Bank for International Settlements

Abstract: Global risk-off shocks can be highly destabilizing for financial markets and, absent an adequate policy response, may trigger severe recessions. Policy responses were more complex for developed economies with very low interest rates after the GFC. We document, however, that the unconventional policies adopted by the main central banks were effective in containing asset price declines. These policies impacted long rates and inspired confidence in a policy-put framework that reduced the persistence of risk-off shocks. We also show that domestic macroeconomic and financial conditions play a key role in benefiting from the spillovers of these policies during risk-off episodes. Countries like Japan, which already had very low long rates, benefited less. However, Japan still benefited from the reduced persistence of risk-off shocks. In contrast, since one of the main channels through which emerging markets are historically affected by global risk-off shocks is through a sharp rise in long rates, the unconventional monetary policy phase has been relatively benign to emerging markets during these episodes, especially for those economies with solid macroeconomic fundamentals and deep domestic financial markets. We also show that unconventional monetary policy in the US had strong effects on long interest rates in most economies in the Asia-Pacific region (which helps during risk-off events but may be destabilizing otherwise -we do not take a stand on this tradeoff).

Keywords: risk-off; conventional and unconventional monetary policy; policy-puts; spillovers; macroeconomic fundamentals; developed and emerging markets; Asia-Pacific region (search for similar items in EconPapers)
JEL-codes: E40 E44 E52 E58 F30 F41 F44 G01 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2019-03
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
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Working Paper: On the Global Impact of Risk-off Shocks and Policy-put Frameworks (2019) Downloads
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