U.S. UNCONVENTIONAL MONETARY POLICY AND TRANSMISSION TO EMERGING MARKET ECONOMIES. David Bowman, Juan M. Londono and Horacio Sapriza

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1 U.S. UNCONVENTIONAL MONETARY POLICY AND TRANSMISSION TO EMERGING MARKET ECONOMIES 1 David Bowman, Juan M. Londono and Horacio Sapriza Dicuion by Emmanuel C Mamatzaki Univerity of Suex Fifth BIS Conultative Council for the America Reearch Conference Bank of Colombia Bogota, 22 May 2014

2 2 generally, what i good for each large, advanced economy i good for the ret of the world (and vice vera) Quote from Global Impact and Challenge of Unconventional Monetary Policie, IMF (2013).

3 3 general remark very timely, creative and thoughtful paper. large data et and thu extenive empirical analyi. intereting reult (though in line with conventional widom and previou finding).

4 overview 4 key quetion: how the effect of UMP announcement in the US meaure up againt an average correlation between EME and US financial condition? UNP announcementà MP pill over: Ø ignaling channel Ø portfolio-balance channel Ø financial market channel empirical trategy: 1. VAR employedà IRF of the effect of US UMP on: EME Ø overeign yield Ø foreign exchange rate Ø tock price 2. an event tudy on the tatitical ignificance of announcement 3. univariate and multivariate panel analyi model that control for country pecific characteritic and other variable. 4. comparion of the reult of the panel model with thoe of the event tudy. finding: IRF how UMP à EME overeign yield (more o for ome) à heterogeneity é ê event tudy in line with IRF panel analyi à vulnerable EME more vulnerable to change in US overeign & high yield bond yield.

5 UMP acro advanced economie 5 Diagram from B. Winkler (2014), International dimenion of conventional and unconventional monetary policy.

6 overeign yield in EME and US 6 Diagram from Bowman et al. (2014).

7 exchange rate 7 Real effective exchange rate indexe (2007=100), Table from Mohan and Kapur (2013).

8 tock price in EME 8 Diagram from A. Carten (2013), Global Dimenion of UMP.

9 remark on data 9 meauring UMP not eay (LSAP1,2,3; MEP; MBS) picking the date of announcement not eay. difficult to decouple the effect of UMP on EME from that of the crii. frequency of data: high frequency v. low frequency (intradaily for announcement). what about the unconventional monetary policy outide US (euro, UK, JP). commodity price. capital flow à could é exchange rate volatility, commodity price volatility, inflation volatility. intitutional factor, capital control, regulation, financial fragility.

10 VAR v. event tudy and panel model 10 UMP hock are plugged in a tructural VAR following Wright (2012) and Rigobon (2003), Rigobon and Sack (2003, 2004, 2005) à rather agnotic à no need to pecify market expectation: provide ueful guide over ign retriction within a macroeconomic model. But depend on a crucial aumption: the monetary policy hock ha mean zero and variance day, otherwie variance. on announcement data-driven approachà identification through heterocedaticity not poible if variance of all other hock are negligible. event tudy: crucially depend on the definition of UMP and the underlying ditribution. panel model: UMP in US à US interet rate (both overeign and HYB) cro interact with country pecific variable (together with ome control variable)à aet price in EME; data frequency monthly? endogeneity?. comparion between event tudy and panel model, but what about the VAR?

11 remark on methodology 11 eparate etimate on the repone of each EME in VAR à poible bia and inefficient etimate à poible é variability in imulation reult à poible inconitency. event tudy over the identification of VAR? conider variance of all hock, but UMP, are inignificant (à no identification through heterocedaticity). minor commend in VAR: VDC? pecification tet? VAR etimation method (OLS, Bayian)? why two tep approach? VAR v event tudy and panel model. panel analyi: à country pecific variable are of importance à could they alo play alo a role in the firt tep of VAR? introduce country pecific (alo Zit) variable in the tructural VAR. the comparion between event tudy and panel model?

12 plethora of empirical evidence, plethora of method exploion of empirical pr: Georgiadi (2014), Chen, Filardo, He and Zhu (2014), Gagnon et al. (2011), Arai (2013), D'Amico et al. (2012), D'Amico and King (2013), Ghyel et al. (2012), Gichrit, Lopez-Salido and Zakrajek (2013), Glick and Leduc (2012), Joyce and Tong (2012), Kiley (2013), Krihnamurthy and Viing- Jorgenen (2011, 2013), Li and Wei (2013), Meaning and Zhu (2011), Neely (2010), Rakin (2013), Roa (2012), Swanon (2011) and Wright (2012), Mohan and M. Kapur (2013), Roger, Scotti and Wright (2014), Chodorow-Reich (2014), Wu and Xia (2014), Chen, Filardo, He, and Zhu (2014). ome propoal on gaining efficiency and conitency: Ø witching regime model o a to ditinguih between crii and non-crii period à further examining aymmetrie Ø panel VAR Ø time-varying parameter VAR (TVP-VAR) Ø Global VAR (GVAR) Ø Global VECM (GVECM) Ø FAVAR Ø Threhold VECM (TVECM) theory challenging. 12

13 P-VAR I: repone to US overeign & US HYB Impule-repone for 1 lag VAR of EMESy USov USy (p 5) USov USov (p 95) USov repone of EMESy to EMESy hock repone of EMESy to USov hock (p 5) USov USov (p 95) USov repone of EMESy to USy hock repone of USov to EMESy hock repone of USov to USov hock (p 5) USov USov (p 95) USov repone of USov to USy hock repone of USy to EMESy hock repone of USy to USov hock repone of USy to USy hock Error are 5% on each ide generated by Monte-Carlo with 500 rep EMESy USov USy EMESy USov USy EMESy USov USy Source: own etimation.

14 P-VAR II: repone to CDS of EME Impule-repone for 1 lag VAR of EMESy USov USy cd (p 5) USov USov (p 95) USov (p 5) cd10 cd10 (p 95) cd repone of EMESy to EMESy hock repone of EMESy to USov hock (p 5) USov USov (p 95) USov repone of EMESy to USy hock repone of EMESy to cd10 hock (p 5) cd10 cd10 (p 95) cd repone of USov to EMESy hock repone of USov to USov hock (p 5) USov USov (p 95) USov repone of USov to USy hock repone of USov to cd10 hock (p 5) cd10 cd10 (p 95) cd repone of USy to EMESy hock repone of USy to USov hock (p 5) USov USov (p 95) USov repone of USy to USy hock repone of USy to cd10 hock (p 5) cd10 cd10 (p 95) cd repone of cd10 to EMESy hock repone of cd10 to USov hock repone of cd10 to USy hock Error are 5% on each ide generated by Monte-Carlo with 500 rep EMESy USov USy cd10 EMESy USov USy cd EMESy USov USy cd Source: own etimation repone of cd10 to cd10 hock

15 P-VAR III: repone to r-differential Impule-repone for 1 lag VAR of EMESy USov USy cd10 rdif (p 5) USov USov (p 95) USov (p 5) cd10 cd10 (p 95) cd10 15 (p 5) rdif rdif (p 95) rdif repone of EMESy to EMESy hock repone of EMESy to USov hock (p 5) USov USov (p 95) USov repone of EMESy to USy hock repone of EMESy to cd10 hock (p 5) cd10 cd10 (p 95) cd repone of EMESy to rdif hock (p 5) rdif rdif (p 95) rdif repone of USov to EMESy hock repone of USov to USov hock (p 5) USov USov (p 95) USov repone of USov to USy hock repone of USov to cd10 hock (p 5) cd10 cd10 (p 95) cd repone of USov to rdif hock (p 5) rdif rdif (p 95) rdif repone of USy to EMESy hock repone of USy to USov hock (p 5) USov USov (p 95) USov repone of USy to USy hock repone of USy to cd10 hock (p 5) cd10 cd10 (p 95) cd repone of USy to rdif hock (p 5) rdif rdif (p 95) rdif repone of cd10 to EMESy hock repone of cd10 to USov hock (p 5) USov USov (p 95) USov repone of cd10 to USy hock repone of cd10 to cd10 hock (p 5) cd10 cd10 (p 95) cd repone of cd10 to rdif hock (p 5) rdif rdif (p 95) rdif repone of rdif to EMESy hock repone of rdif to USov hock repone of rdif to USy hock repone of rdif to cd10 hock Error are 5% on each ide generated by Monte-Carlo with 500 rep repone of rdif to rdif hock EMESy USov USy cd10 rdif EMESy USov USy cd rdif EMESy USov USy cd rdif Source: own etimation

16 P-VAR IV: repone to policy rate & volatility for currency option 16 Impule-repone for 1 lag VAR of EMESy USov USy policyrate cur (p 5) USov USov (p 95) USov (p 5) cur cur (p 95) cur repone of EMESy to EMESy hock repone of EMESy to USov hock repone of EMESy to USy hock repone of EMESy to policyrate hock repone of EMESy to cur hock (p 5) USov USov (p 95) USov (p 5) cur cur (p 95) cur repone of USov to EMESy hock repone of USov to USov hock repone of USov to USy hock repone of USov to policyrate hock repone of USov to cur hock (p 5) USov USov (p 95) USov (p 5) cur cur (p 95) cur repone of USy to EMESy hock repone of USy to USov hock repone of USy to USy hock repone of USy to policyrate hock repone of USy to cur hock (p 5) USov USov (p 95) USov (p 5) cur cur (p 95) cur repone of policyrate to EMESy hock repone of policyrate to USov hock repone of policyrate to USy hock repone of policyrate to policyrate hock repone of policyrate to cur hock (p 5) USov USov (p 95) USov (p 5) cur cur (p 95) cur repone of cur to EMESy hock repone of cur to USov hock repone of cur to USy hock repone of cur to policyrate hock Error are 5% on each ide generated by Monte-Carlo with 500 rep repone of cur to cur hock EMESy USov USy policyrate cur EMESy USov USy policyrate cur EMESy USov USy policyrate cur Source: own etimation.

17 P-VAR experiment V: repone to carry to rik Impule-repone for 1 lag VAR of EMESy USov USy policyrate carry (p 5) USov USov (p 95) USov (p 5) carry carry (p 95) carry repone of EMESy to EMESy hock repone of EMESy to USov hock repone of EMESy to USy hock repone of EMESy to policyrate hock repone of EMESy to carry hock (p 5) USov USov (p 95) USov (p 5) carry carry (p 95) carry repone of USov to EMESy hock repone of USov to USov hock repone of USov to USy hock repone of USov to policyrate hock repone of USov to carry hock (p 5) USov USov (p 95) USov (p 5) carry carry (p 95) carry repone of USy to EMESy hock repone of USy to USov hock repone of USy to USy hock repone of USy to policyrate hock repone of USy to carry hock (p 5) USov USov (p 95) USov (p 5) carry carry (p 95) carry repone of policyrate to EMESy hock repone of policyrate to USov hock repone of policyrate to USy hock repone of policyrate to policyrate hock repone of policyrate to carry hock (p 5) USov USov (p 95) USov (p 5) carry carry (p 95) carry repone of carry to EMESy hock repone of carry to USov hock repone of carry to USy hock repone of carry to policyrate hock Error are 5% on each ide generated by Monte-Carlo with 500 rep repone of carry to carry hock EMESy USov USy policyrate carry EMESy USov USy policyrate carry EMESy USov USy policyrate carry Source: own etimation.

18 ceante caua, ceat effectu, from Aritotle philoophy (Phyica and Metaphyica) 18

19 19 the caue being removed, the effect ceae Malyne, on England economic crii in the early 1620, argued the way to overcome crii i through breaking-down all it component and through reforming the trade of the commonwealth, but: breakdown/decompoition/identify of caue not eay. complexity à primary immediate caue and mediate not primary caue. and yet there i more never ended complexity à activity and paivity in all thing ( Aritotle, Phyica). would money be active and commoditie paive? would thoe two differ no more than the way from Thebe to Athen and from Athen to Thebe? too many quetion on the criià too many caueà poible too complex for ceat effectu.

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