A Global Monetary Tsunami? Measuring the Spillovers of US Quantitative Easing

The paper analyses the global effects of the Federal Reserve’s unconventional monetary policy measures since 2007. First, we find that Fed measures in the early phase of the crisis (QE1) were quite effective in lowering sovereign yields and raising equity markets globally. Yet Fed policies functioned in a pro-cyclical manner for capital flows to EMEs and a counter-cyclical way for the US, triggering a portfolio rebalancing across countries (rather than across asset classes) out of emerging markets (EMEs) into US equity and bond funds under QE1, and in the opposite direction since 2010 (QE2). Second, the impact of Fed operations, such as Treasury and MBS purchases, on portfolio allocations and asset prices dwarfed those of Fed announcements, underlining the importance of the market repair and liquidity functions of Fed policies. Third, we find no systematic evidence that FX and monetary policies helped countries shield themselves from these US policy spillovers, but rather that investor portfolio responses to Fed policies are related to country risk. The results thus illustrate how US monetary policy since 2007 has contributed to portfolio reallocation as well as a re-pricing of risk in global financial markets.