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Non-conventional monetary policy and global finance

Empirical evidence shows that non-conventional monetary policy in large advanced economies has shaped financial conditions in the rest of the world. In particular, non-conventional easing has boosted EM bank balance sheets and securities issuance. This goes some way in explaining why the emerging world has become so vulnerable to even just tapering of these policies.

Korniyenko, Yevgeniya and Elena Loukoianova (2015), “The Impact of Unconventional Monetary Policy Measures by the Systemic Four on Global Liquidity and Monetary Conditions”, IMF Working Paper, WP/15/287

The below are excerpts from the paper. Technical acronyms have been replaced. Headings, links and cursive text have been added.
On the motivation, types and systemic risks of non-conventional monetary policy view summary here.

A brief narrative

“The primary purpose of non-conventional monetary policies has been to restore the functioning of financial markets and intermediation and to provide further monetary policy accommodation at the zero lower bound…One distinguishing feature of non-conventional monetary policies…is that the central bank actively uses its balance sheet to influence market prices and conditions…During normal times, the central bank is neither involved in direct lending to the private sector or the government, nor in outright purchases of government bonds, corporate debt, or other types of debt instruments.”

“With money and securities being imperfect substitutes, these programs resulted in portfolio rebalancing of assets…Investors responded by acquiring more risky assets outside the S4 [‘systemic 4’, meaning the U.S., the euro area, Japan and the UK] that became relatively more attractive compared with S4 government bonds and securities…leading to increased inflows and issuance of new securities in emerging market economies…Emerging market economies significantly intensified their borrowing from abroad in the form of equities and securities after 2009. During 2009–13, the purchase of EM private securities tripled relative to the pre-crisis period of 2002–07.”

“Monetary authorities [in emerging economies]…have expanded their balance sheets significantly as well, as a result of an accumulation of foreign reserves and sterilization operations. Additionally, on average, banking systems [have increased]… their balance sheets rapidly… Since the peak in Q4:2008, advanced economies’ banks’ leverage has been decreasing, while banks in emerging market economies have been slowly leveraging up by increasing their exposure equally to all sectors of the domestic economy.”

“The substitution of cross-border banking flows with portfolio flows of non-banks does raise new concerns about financial vulnerabilities. The growing role of non-financial corporations as de facto ‘financial intermediaries’ may reduce the effectiveness of macroprudential policies.”

Empirical evidence

“This paper…[investigates] empirically… spillovers from S4 monetary policy easing on the rest of the world’s monetary aggregates, banks’ balance sheets (corporate deposits), and non-financial corporates’ securities issuances… The paper develops a new quarterly dataset covering the period Q1:2002–Q2:2014, leveraging monetary data reported by IMF member countries through the IMF’s standardized report forms… Our sample includes 131 countries, of which 28 are grouped as advanced and 103 emerging market and developing economies (including low-income countries).”

“Our regression analysis is also based on a two-step approach: First, we…extract the variation in yields explained by implemented non-conventional monetary policies… Second, we elaborate on the relationship between non-conventional monetary policies in each of the S4 and the associated changes in global money supply, global corporate deposits (including China), global domestic or cross-border credit, and global issuance of international securities.”

“We find positive and statistically significant relationships between non-conventional monetary policyimplementation and global liquidity and monetary conditions… These results are largely driven by the emerging market economies… The results for advanced economies are mixed and generally less significant.”

“The main results…are the following:

  • There is a positive but not robustly significant impact of S4 non-conventional monetary policies on global liquidity measures, as defined by the global growth of broad money…global non-financial corporations’ deposit growth, or global domestic credit growth.
  • There is a positive impact of total S4 non-conventional monetary policies on international banks’ cross-border credit growth, and, in particular, extension of loans with longer maturity.
  • There is a positive association between S4 non-conventional monetary policies and international issuance of debt securities by non-S4 countries in FX.
  • U.S. quantitative easing has a significantly positive association with the growth rate of broad money in advanced economies…The U.S. quantitative easing programs might dominate in impact due to its size and the relevance of the U.S. dollar as a global transaction currency.
    [On the dominance of USD lending and related setback risks also view post here.]
  • We also find positive impact of the euro area non-conventional monetary policies on global issuance of non-financial corporates’ securities, primarily driven by the impact on other advanced economies.”

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