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International spillovers of quantitative easing

Marcin Kolasa () and Grzegorz Wesołowski

No 309, NBP Working Papers from Narodowy Bank Polski, Economic Research Department

Abstract: This paper develops a two-country model with asset market segmentation to investigate the effects of quantitative easing implemented by the major central banks on a typical small open economy that follows independent monetary policy. The model is able to replicate the key empirical facts on emerging countries’ response to large scale asset purchases conducted abroad, including inflow of capital to local sovereign bond markets, an increase in international comovement of term premia, and change in the responsiveness of the exchange rate to interest rate differentials. According to our simulations, quantitative easing abroad boosts domestic demand in the small economy, but undermines its international competitiveness and depresses aggregate output, at least in the short run. This is in contrast to conventional monetary easing in the large economy, which has positive spillovers to output in other countries. We also find that limiting these spillovers might require policies that affect directly international capital flows, like imposing capital controls or mimicking quantitative easing abroad by purchasing local long-term bonds.

Keywords: quantitative easing; international spillovers; bond market segmentation; term premia (search for similar items in EconPapers)
JEL-codes: E44 E52 F41 (search for similar items in EconPapers)
Pages: 57
Date: 2019
New Economics Papers: this item is included in nep-cba, nep-cse, nep-dge, nep-ifn, nep-mac, nep-mon and nep-opm
Note: The paper benefited from comments received at the CEF conference in New York, EEA-ESEM meeting in Lisbon, ESCB Research Cluster 1 workshop in Madrid, SNDE conference in Tokyo, NBP-BoL-CEBRA-CEPR conference “International Spillovers” in Warsaw, WGEM EAGLE Network meeting in Frankfurt, and a seminar at the ECB.
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Journal Article: International spillovers of quantitative easing (2020) Downloads
Working Paper: International spillovers of quantitative easing (2018) Downloads
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