Unconventional Monetary and Exchange Rate Policies

Bayoumi, Tamim; Gagnon, Joseph E.; Londono, Juan M.; Saborowski, Christian; Sapriza, Horacio

doi:10.17016/IFDP.2017.1194

Working Paper

Unconventional Monetary and Exchange Rate Policies

Abstract: This paper explores the direct effects and spillovers of unconventional monetary and exchange rate policies. We find that official purchases of foreign assets have a large positive effect on a country's current account that diminishes considerably as capital mobility rises. There is an important additional effect through the lagged stock of official assets. Official purchases of domestic assets, or quantitative easing (QE), appear to have no significant effect on a country's current account when capital mobility is high, but there is a modest positive impact when capital mobility is low. The effects of purchases of foreign assets spill over to other countries in proportion to their degree of international financial integration. We also find that increases in US bond yields are associated with increases in foreign bond yields and in stock prices, as well as with depreciations of foreign currencies, but that all of these effects are smaller on days of US unconventional monetary policy announcements. We develop a theoretical model that is broadly consistent with our empirical results and that highlights the potential usefulness of domestic unconventional policies as responses to the effects of foreign policies of a similar type.

Keywords: Current account balance; Unconventional monetary policy; Foreign exchange intervention; Quantitative easing;

JEL Classification: F36; F42;

https://doi.org/10.17016/IFDP.2017.1194