US Treasury securities play a special role in the global economy, as the US dollar is the dominant reserve currency and no other sovereign or private debt instruments are seen as perfect substitutes.
If quantitative easing lowers US long-term bond yields, investors could turn to emerging market assets of similar maturities for higher risk-adjusted returns. This would boost asset prices and lower long-term interest rates in the emerging economies, effectively easing financial conditions there. With a well-integrated global market, a sizeable quantitative easing in one economy would boost global liquidity. With the policy commitment implicitly or explicitly embodied in quantitative easing, the policy rate is expected to stay near zero in the foreseeable future in the major advanced economies. Quantitative easing could spur carry trades and capital flows into emerging economies with higher risk-adjusted rates of return, which in turn would push up consumer and asset prices. In addition, persistently low interest rates and abundant liquidity would create incentives for financial institutions in both advanced and emerging economies to search for yields, taking on greater risk for contractual or institutional reasons. An extended period of suppressed interest rates could also lead banks to miscalculate risksRecently, The central banks of other countries are planning to taper their QE , while japan is planning to increase their QE until 2019-2020 , this is so that the overall QE in the world economy will stay constant. ??Through a third – exchange rate – channel, quantitative easing may work in the form of exchange rate depreciation with respect to other economies.
The impact on emerging economies can be large if the depreciation is to a major international reserve currency. Currency speculation can also play a role by increasing the size and volatility of capital flows.Advanced countriesMoreover, real effects of quantitative easing in the advanced economies could spread directly through an external demand or trade channel.
Quantitative easing could boost demand for emerging economy goods and services through easier trade credit and increased spending in the advanced economies. However, such effects depend on the level of import elasticity in the advanced economies, and must be balanced against the likely impact of an appreciation of emerging market currencies caused by the quantitative easing.Since central bank balance sheet policies are designed for domestic contingencies and should be mostly felt in the domestic economy, and any spillover beyond borders should be contained and of limited impact.Similar central bank balance sheet policies in the advanced economies could have rather different impact across emerging economies and over time, depending on varying economic conditions. During the global financial crisis and the ensuing recession, as well as in the earlier phase of recovery, such policies apparently helped stabilise global financial markets, support trade credit and prevent a collapse of demand and real activity in both the advanced and emerging economies.
In a second phase, as recovery gathered speed in the emerging economies but languished in the major advanced economies, growth prospects have since diverged. Growth and interest rate differentials have risen (see Graph IV.1); cheap and abundant liquidity may have encouraged large capital flows, partly speculative, into a number of emerging economies.