Quantitative Easing Spillovers

This paper studies the spillover effects of US quantitative easing on emerging market economies. I estimate the spillover effects using Bayesian VAR models for the US economy and a set of emerging market economies. A 1% increase in the Federal Reserves securities held outright has positive and statistically significant effects on real GDP, real Investment, the price level, and asset prices in the US economy. Emerging market economies experience positive statistically significant effects on real GDP, real investment, inflation, and stock market indices, along with currency appreciation, current account deterioration, and increase in their long-term bond yields. Then I build a two-country Heterogeneous-Agents New Keynesian model with QE shocks and dollarized bank balance sheets in the EME. The model is estimated to match the empirical movements. Bank balance sheets are at the heart of the international transmission mechanism. The choice between HANK vs. RANK matters for the magnitude of the impulse responses since the absence of heterogeneity leads to lower aggregate demand in both countries. The model predicts that QE decreases inequality in the medium run, but in the short run, wealth inequality rises in the US economy, whereas in the emerging market economy wealth inequality increases and remains elevated over time. Finally, policies aiming to reduce the flow of capital between countries, such as capital controls, have significant adverse effects on economic activity and welfare