Analyzing the Transmission Channels of US Quantitative Easing Announcement Spillovers into Emerging Market Economies

Abstract

Quantitative easing is an unconventional monetary policy that has been frequently used by the US Federal Reserve to domestically stimulate the economy after the financial crisis of 2008. However, the Fed’s quantitative easing programs were found to have significant ramifications on emerging market economies (EME)’s financial markets. To explore the impact of quantitative easing on EME financial markets, I measure the spillover effects from the US S&P 500, US financial sector (XLF), US 10-year yield, and emerging bond market index (EMBI) on several EME’s equity prices and exchange rates by using high frequency Federal funds and Eurodollar futures data and a series of linear autoregressions and instrumental variable regressions. From my analysis, I find that a quantitative easing announcement’s positive effect on the S&P 500 and diminishing effect on emerging market yields lead to an increase in most EME’s equity prices and an appreciation against the dollar. From these results, I also find that the spillover from the EMBI is slightly larger than the spillover from the S&P 500. Furthermore, estimations of the spillover from the US financial sector illustrate that a quantitative easing announcement’s effect on the financial sector also leads to an appreciation against the dollar.