Publication - Global impact of US and euro area unconventional monetary policies - a comparison by Qianying Chen, Marco Jacopo Lombardi, Alex Ross and Feng Zhu
The Global Financial Crisis, which started in August 2007 and intensified following the bankruptcy of Lehman Brothers in September 2008, swept and deeply affected the financial markets in both advanced and emerging economies. The Crisis had two major components: the US subprime mortgage crisis; and the European sovereign debt crisis which exploded with the Greek debt crisis in May 2010.
The virulence of market turbulences was soon translated into a major slowdown in global real activity as world exports collapsed, the Great Recession ensued. In response to mounting challenges, the US Federal Reserve cut rapidly its target for the federal funds rate, to a range between 0% and 0.25% in December 2008. Similarly, the European Central Bank (ECB) lowered its main refinancing and deposit facility rates to 1% and 0.25% in May 2009, from 4.25% and 3.25% in October 2008, respectively.
This proximity to the zero lower bound (ZLB) on nominal interest rates limited the scope for implementing additional monetary easing through further cuts to the policy rate. Consequently, the Federal Reserve and the ECB departed from the standard approach of reacting to inflation and output developments by changing the policy rate and have since adopted a wide range of unconventional or nonstandard measures. These measures, also known as quantitative easing (QE), include unprecedented money-market support measures, special loan programmes, largescale asset purchases and forward guidance.3 QE measures were considered to have provided significant stimulus to the domestic economy, and given the importance of the United States and euro area in the global economy, there are strong interests in a better understanding of how and to what extent such unconventional policy measures have affected the global economy.
There is a burgeoning literature on the impact of QE policies taken by central banks in the major economies. Most papers focus on the domestic dimension and relied on event studies analysing QE announcement effects on asset prices, while some studies employ regression analysis. Among others, D’Amico and King (2010), Doh (2010), Gagnon, Raskin, Remache and Sack (2010, 2011), Joyce, Lasaosa, Stevens and Tong (2011), Krishnamurthy and Vissing Jorgensen (2011) and Meaning and Zhu (2011, 2012) provide estimates for the effects of large-scale asset purchase programmes implemented by the Federal Reserve and the Bank of England.
A good knowledge of the spillovers associated with QE measures may help policymakers to cope with the challenges posed by such policies and to assess the need for international policy coordination. Several studies examine the cross-border financial market impact of QE policies. Relying on event studies of US asset purchases, Neely (2010) finds that US QE lowered bond rates in the other advanced economies by 20-80 basis points and depreciated the US dollar by 4-11%. Glick and Leduc (2012) show that commodity prices on average fell upon the announcements of US asset purchases, despite a decline in long-term interest rates and US dollar depreciation. Chen, Filardo, He and Zhu (2012) and Rogers, Scotti and Wright (2014) provide evidence on the international spillovers of QE measures implemented by the Bank of England, the ECB, the Federal Reserve and the Bank of Japan. Fratzscher, Lo Duca and Straub (2013) find that earlier US QE measures were highly effective in lowering sovereign yields and raising equity prices. But since 2010 such measures had a muted impact on yields across countries. Fratzscher, Lo Duca and Straub (2014) find that ECB non-standard measures had beneficial impact on euro area asset prices and reduced bond market fragmentation, with a positive cross-border impact on global equity markets and confidence. IMF (2013a, b) finds that unconventional monetary policies successfully restored market functioning and intermediation in the early phase of the global financial crisis, but their continuation carried risks.
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