This document discusses global liquidity, cross-border capital flows, and the spillover effects of quantitative easing (QE) policies. It finds that while QE in advanced economies increased global liquidity, it also led to volatile cross-border bank flows and capital movement. QE announcement and policies had significant spillover effects on financial markets and economies of emerging markets through channels like interest rates, asset prices, currency values, and capital flows. The tapering and eventual exit from QE poses risks to financial stability in emerging markets. Understanding these global linkages is important for macroprudential policymaking.

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Global Liquidity, cross-border flows, and
QE spillovers
Feng ZHU (Bank for International Settlements)
Singapore, 19 July 2013
Disclaimer: views expressed belong to the author alone and do not reflect those of the BIS.

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Outline
 Crisis, unconventional monetary easing and expanding global
official liquidity
 Recent developments in cross-border banking flows: global
private liquidity
 Spillovers to EMEs of QE in advanced economies
 Policy implications
 Macro and financial stability

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Global official liquidity: the great monetary easing

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Global private liquidity: credit to the private sector
As a percentage of GDP; unweighted averages

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Global spillovers: transmission channels?

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Global bank credit aggregates
By borrower region, at constant end-Q4 2012 exchange rates

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Cross-border flows: some recent developments
 Cross-border claims fell in 2012 Q4 by $345 bn (1.2% Q/Q)
 Sharp decline in cross-border interbank lending ($467 bn,
2.6%) offset higher cross-border credit to non-banks
 Borrowers in adv. economies (US, Europe) most affected
 Claims on EM borrowers rose ($43 bn, 1.4%), mostly on banks
 Claims on Asia-Pacific rose most, China accounted for ½
 Banks also expanded local operations in EMEs
 Cross-border bank lending
 Far more volatile than other flows & domestic credit
 Low interest rates globally
 Corporations lock in cheap funding
 Global interest rate risks

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Growth in international claims
Year-on-year rate

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Growth rates of cross-border claims on EM residents
In per cent

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Bond issuance
By original maturity

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Spillovers to EMEs of QE in advanced economies
 Chen, Filardo, He and Zhu (2011, 2013)
 Does QE have significant cross-border spillovers?
 Announcement effects in financial markets
 Global VAR: longer-term impact on economy
 Can QE spillovers be harmful?
 Business cycle in EMEs: growth and inflation
 Financial cycles in EMEs: FX, capital flows, credit, asset
markets
 Impact of QE Tapering and eventual exit?

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Announcement effects of Federal Reserve QE

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Global VAR: 2-year cumulative impact
Impulse responses from US term spread (23 bps) and risk spread (28 bps)
• US QE has greater impact on a number
of emerging economies than on US
domestic economy
• US risk spread reduction tends to have
considerable expansionary impact on
most EMEs.
• Impact of US term spread shock weaker
and more diverse across countries

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Global VAR: 2-year cumulative impact
Impulse responses from US term spread (23 bps) and risk spread (28 bps)
• Term Spread reduction leads to persistent
asset price boom, while boom after a risk
spread reduction is relatively short-lived.
• Risk spread tends to increase bank credit
and exert greater currency appreciation
pressure.
-6
-4
-2
0
2
4
6
8
UK US JP XM PH CN IN SG KR HK ID TH MY BR CL MX AR
Percent
Bank Credit
risk
term
-20
-15
-10
-5
0
5
10
15
UK JP XM US MY KR TH SG IN CN HK PH ID CL AR MX BR
Percent
Stock Price
risk
term
-15
-10
-5
0
5
10
15
20
25
30
US UK JP XM TH HK IN MY KR SG CN ID PH CL MX AR BR
PercentPoint
Foreign Exchange Pressure
risk
term

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Market impact of Bank of Japan announcement
In per cent

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Federal Reserve QE tapering:
Global equity prices and volatility

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VIX volatility and EME equity and bond fund flows

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Conclusion
 Financial and business cycles increasingly global: liquidity flows
around
 Cross-border flows large and volatile, recently declined in
advanced economies but increased in most EMEs
 QE in advanced economies had significant spillovers
 Be ware of QE Tapering and … exit
 Need to understand better the strength and channels of
transmission of QE (and its exit) to EMEs
 Financial stability and macro-prudential tools