On The International Spillover Effects Of The U.S. Fed's Quantitative Easing: Lessons From Latin America

Abstract

This study provides a threefold contribution to existing literature. It examines the international spillover effects of quantitative easing, the unconventional monetary policy conducted by the US Fed during the global financial crisis of 2008-2009. As there is a gap in scholarship surrounding QE spillover to Latin America, this thesis adds a novel contribution to the literature. First, using an event study framework, this study explores the movements in capital markets around QE events: sharp decreases of sovereign yields, increases in equity indexes across the region, and slight depreciation of the exchange rates against the US Dollar were the initial effects of QEI. Second, using a dynamic panel model, this paper explores the interdependent relationship between QE and capital flows towards Latin America. Particularly, a study of the three main capital flows transmission channels – liquidity, portfolio rebalancing, and market volatility – suggests QE significantly increased capital inflows to Latin America between 2008 and 2012. Building upon the positive and significant relationship illustrated by the observable channels, the unobservable proxy of QE further suggests that QEI created a structural shift of capital flows, thus somewhat diminishing the full effect of unconventional monetary policy captured by the observable channels. Given Asian markets’ – especially China’s – fast rebound after the global financial crisis, a comparative study of Asian economics suggests that Asian economies, unlike those of Latin America, captured most of the capital flows from QEI. Third, this paper models the initial effect of QE on long-term inflation expectations. 10-year zero-coupon inflation swaps suggest Latin American countries priced an average decrease of 158 basis points during the announcement of nine QEI events. Furthermore, results imply the effect of QEII and QEIII on long-term inflation expectations was somewhat negligible.