Central Bank Balance Sheet Policies and Emerging Markets

Manmohan Singh and Haobin Wang

Short-term policy rates in many advanced economies (AEs) have remained persistently low since the aftermath of the global financial crisis. In an effort to manage sluggish economic recoveries and reinvigorate growth, several leading central banks (eg, the Federal Reserve in the US, the Bank of England, the European Central Bank (ECB) and the Bank of Japan) have carried out several rounds of quantitative easing (QE) or balance sheet policies to provide further monetary stimulus.

We show that conventional interest-rate policy and balance sheet adjustments consist of two independent dimensions of monetary policy in some AEs; furthermore, these two independent policy tools differ in their respective financial spillovers to emerging markets (EMs). While interest rate policy in AE spills over to EM via simple interest rate differential, balance sheet policy in AE instead create private portfolio shifts of different types of international assets, resulting in more nuanced market impact. In the context of QE, for instance, while some AE agents choose to hedge against QE by replacing AE assets with EM counterparts, others voluntarily choose to absorb the increased supply of central bank

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