Shaping the “Monetary Tsunami:” Political Institutions and Spillovers from Quantitative Easing Open Access

Kliewer, Andrew (Spring 2020)

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Following the Great Recession of 2007-2009, central banks in developed countries faced a sluggish economy not responding to traditional monetary tools. With interest rates near, at, or below zero, these banks turned to a novel solution: “quantitative easing” (QE). By purchasing government bonds and private securities through QE programs, central banks were able to drive down long-term interest rates and provide monetary stimulus to depressed economies. These programs led to unintended “spillovers” in emerging market economies. Investors moved their assets to these countries seeking higher returns as developed countries pushed down long-term interest rates. When central banks tapered QE by gradually reducing asset purchases, capital flowed out of these nations, causing negative macroeconomic effects.

A significant amount of heterogeneity exists in the level of spillover effects emerging markets experienced. I hypothesize that political institutional features of these nations, namely government and central bank transparency, central bank independence, and level of democracy, can explain this variation. Using methodology developed by MacDonald (2017) and others, I run a linear multivariate regression interacting these four political variables with US Federal Reserve asset purchases, looking at changes in the bond, stock, foreign exchange, and property markets of emerging economies between December 2009 and December 2014. I find evidence that each of these institutional factors influence spillovers to a degree, with central bank independence having the strongest effect. These variables amplify or mediate spillovers in the bond market to the greatest extent, although I find some evidence of influence in the property market as well. Ultimately, my research shows that political institutions can explain some of the variation in spillovers across countries. Further research could provide more definitive answers concerning the mechanism of these effects.

Table of Contents

Introduction. 1

Literature Review: Spillover Effects. 6

Literature Review: Political Institutions. 11

Data and Methods. 20

Results. 28

Robustness. 31

Discussion. 33

Case Studies. 36

Conclusion. 40

Works Cited. 42

Figures. 46

Appendices. 57

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