effects of the u.s. quantitative easing on the peruvian ... · e ects of the u.s. quantitative...
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Effects of the U.S. Quantitative Easing on thePeruvian Economy
Cesar CarreraRocıo Gondo
Fernando PerezNelson Ramırez-Rondan
Central Bank of Peru
May 22, 2014
Ramirez-Rondan (BCRP) US QE and Peru May 22, 2014 1 / 28
A brief overview
Quantitative Easing (QE) policies are used in developed economies tostimulate their economies when standard monetary policy has become inef-fective (when the short-term interest rate is at its zero lower-bound).
A central bank implements QE by purchasing assets of longer maturity, andthereby lowering longer-term interest rates, while simultaneously increasingthe monetary base.
In November 2008, the Federal Reserve started buying mortgage-backedsecurities, treasury securities and other financial assets in different rounds(QE1, QE2, operation twist and QE3.)
Ramirez-Rondan (BCRP) US QE and Peru May 22, 2014 2 / 28
A brief overviewFED’s Quantitative Easing
Figure: FED’s Balance Sheet
2500
3000
3500
4000
4500
Bil
lio
ns
of
US
$
Others
Securities Held Outright
Support for Specific Institutions
All Liquidity Facilities
0
500
1000
1500
2000
Bil
lio
ns
of
US
$
0
1-Aug-07 7-May-08 11-Feb-09 18-Nov-09 25-Aug-10 1-Jun-11 7-Mar-12 12-Dec-12 18-Sep-13
Source: Federal Reserve Economic Data (FRED)Ramirez-Rondan (BCRP) US QE and Peru May 22, 2014 3 / 28
A brief overviewContribution and main result
Most of the work on QE is focused on developed countries. However, USquantitative easing policies also have spillover effects on developing coun-tries.
After each US QE round, most emerging economies may have experiencedlarge surges in capital inflows, which led to exchange rate appreciation, highcredit growth, asset price booms, among other effects.
Contribution: this paper assesses empirically the US QE effects on thePeruvian Economy. We focus on economic growth and inflation.
Main result: we find small effects on those variables, based on a structuralVAR (SVAR) model with block exogeneity (Zha, 1999) and sign and zerorestrictions.
Ramirez-Rondan (BCRP) US QE and Peru May 22, 2014 4 / 28
A brief overviewContribution and main result
Most of the work on QE is focused on developed countries. However, USquantitative easing policies also have spillover effects on developing coun-tries.
After each US QE round, most emerging economies may have experiencedlarge surges in capital inflows, which led to exchange rate appreciation, highcredit growth, asset price booms, among other effects.
Contribution: this paper assesses empirically the US QE effects on thePeruvian Economy. We focus on economic growth and inflation.
Main result: we find small effects on those variables, based on a structuralVAR (SVAR) model with block exogeneity (Zha, 1999) and sign and zerorestrictions.
Ramirez-Rondan (BCRP) US QE and Peru May 22, 2014 4 / 28
A brief overviewContribution and main result
Most of the work on QE is focused on developed countries. However, USquantitative easing policies also have spillover effects on developing coun-tries.
After each US QE round, most emerging economies may have experiencedlarge surges in capital inflows, which led to exchange rate appreciation, highcredit growth, asset price booms, among other effects.
Contribution: this paper assesses empirically the US QE effects on thePeruvian Economy. We focus on economic growth and inflation.
Main result: we find small effects on those variables, based on a structuralVAR (SVAR) model with block exogeneity (Zha, 1999) and sign and zerorestrictions.
Ramirez-Rondan (BCRP) US QE and Peru May 22, 2014 4 / 28
Outline
1 Related literature
2 Empirical strategy
3 Counterfactual analysis
4 Conclusion
Ramirez-Rondan (BCRP) US QE and Peru May 22, 2014 5 / 28
Related literature
Baumeister and Benati (2012): SVAR with sign restrictions for QEeffects in the U.S. and the U.K. and find that compressions in thelong-term yield spread exert a powerful effect on both output growthand inflation.
Schenkelgerg and Watzka (2013): SVAR with zero and sign restrictionsfor QE effects in Japan and find that a QE shock leads to a 7 percentdrop in long-term interest rates and a 0.4 percent increase in industrialproduction.
Ramirez-Rondan (BCRP) US QE and Peru May 22, 2014 6 / 28
Related literature
Main channels highlighted about QE effects for developing countries:
Liquidity channel, increased global liquidity leads to investors search-ing for investment opportunities in emerging markets (increase of capi-tal inflows to emerging economies). This induces higher credit growth.
Exchange-rate channel, increase in capital inflows implies an ex-change rate appreciation. Central banks that reduce the volatility inforex market accumulates international reserves.
Trade channel, the increase in output growth in advanced economies,increases demand for exports from emerging markets.
Terms-of-trade channel, investors bought gold with part of the excessof liquidity. Relevant for mineral exporter countries (e.g. Chile, Peru).
Ramirez-Rondan (BCRP) US QE and Peru May 22, 2014 7 / 28
Empirical strategySVAR with block exogeneity
The approach considers a two-block SVAR model featuring (1) the bigeconomy and (2) a the small open economy. Where the last block isexogenous for the first one.
Cushman and Zha (1997) argue that the imposition of block exogeneityin a SVAR is a natural extension for a small open economy modelbecause it helps the identification of the monetary policy from theviewpoint of this small open economy.
The use of block exogeneity also reduces the number of parametersneeded to estimate for the small open economy block.
Ramirez-Rondan (BCRP) US QE and Peru May 22, 2014 8 / 28
Empirical strategyThe setup
The big economy (US economy):
y∗′t A∗0 =
p∑i=1
y∗′t−iA∗i + w′tD
∗ + ε∗′t (1)
where y∗t is n∗ × 1 vectors of endogenous variables for the big economy; ε∗tis n∗ × 1 vectors of structural shocks for the big economy (ε∗t ∼ N(0, In∗));A∗i and A∗i are n∗ × n∗ matrices of structural parameters for i = 0, . . . , p;wt is a r × 1 vector of exogenous variables; D∗ is r × n matrx of structuralparameters; p is the lag length; and, T is the sample size.
Ramirez-Rondan (BCRP) US QE and Peru May 22, 2014 9 / 28
Empirical strategyThe setup
The small open economy (Peruvian economy):
y′tA0 =
p∑i=1
y′t−iAi +
p∑i=0
y∗′t−i A∗i + w′tD + ε′t (2)
where yt is n × 1 vector of endogenous variables for the small economy; εtis n×1 vector of structural shocks for the domestic economy (εt ∼ N(0, In)and structural shocks are independent across blocks i.e. E (εtε
∗′t ) = 0n×n∗);
Ai are n × n matrices of structural parameters for i = 0, . . . , p; and, D isr × n matrix of structural parameters.
Ramirez-Rondan (BCRP) US QE and Peru May 22, 2014 10 / 28
Empirical strategyThe setup
Compact form:
[y′t y∗′t
] [ A0 −A∗00 A∗0
]=
p∑i=1
[y′t−i y∗′t−i
] [ Ai A∗i0 A∗i
]+w′t
[DD∗
]+[ε′t ε∗′t
] [ In 00 In∗
]
Ramirez-Rondan (BCRP) US QE and Peru May 22, 2014 11 / 28
Empirical strategyData
Monthly data: January 2002-December 2013.
Adoption of a fully-fledged inflation targeting regime.
Finalization of a long period of political and economic instability.
Variables from the US economy:
Economic policy uncertainty index (EPUUS).
Term spread indicator (Spread).
M1 Money Stock (M1US).
Federal Funds Rate (FFR).
Consumer Price Index (CPIUS).
Industrial Production Index (IPUS).
Ramirez-Rondan (BCRP) US QE and Peru May 22, 2014 12 / 28
Empirical strategyData
Variables from the Peruvian economy:
Terms of trade (TOT).
Real Exchange Rate (RER).
Interbank Interest Rate in Soles (INT).
Aggregated Credit of the Banking System in US Dollars (CredFC).
Aggregated Credit of the Banking System in Soles (CredDC).
Consumer Price Index (CPI).
Real Gross Domestic Product (GDP).
Ramirez-Rondan (BCRP) US QE and Peru May 22, 2014 13 / 28
Empirical strategyIdentifying QE shocks
QE shock: lowering longer-term interest rates, while simultaneously in-creasing the monetary base and keeping the federal fund rate low.
(a) US M1 money stock (b) Long- and short-term interest rates
2000
2200
2400
2600
2800
1000
1200
1400
1600
1800
QE1 QE2 QE3
01Q1 02Q1 03Q1 04Q1 05Q1 06Q1 07Q1 08Q1 09Q1 10Q1 11Q1 12Q1 13Q1
4.0
5.0
6.0
7.0
10-Year Treasury Constant Maturity Rate
Effective Federal Funds Rate
0.0
1.0
2.0
3.0
QE1 QE2 QE3
0.0
2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1
Source: FRED.
Ramirez-Rondan (BCRP) US QE and Peru May 22, 2014 14 / 28
Empirical strategyIdentifying QE shocks
Table: Identifying Restrictions for a QE shock in the U.S.
Variable QE shock
US term spread indicator (Spread) −US M1 money stock (M1US) +Federal Funds Rate (FFR) 0Other US variables ?Domestic (Peru) block ?
Note: ? = left unconstrained.
Baumeister and Benati (2012) and Peersman (2011) impose similar identi-fication for the US economy and the Euro area, respectively.
Ramirez-Rondan (BCRP) US QE and Peru May 22, 2014 15 / 28
Empirical strategyResponses after a QE shock
Figure: U.S. responses after a QE shock; median value and 66% bands
15 30 45 60−1
0
1
2
3
EPUUS
15 30 45 60
−15
−10
−5
0
5x 10
−3 Spread
15 30 45 60
−0.02
0
0.02
0.04
0.06
0.08
M1US
15 30 45 60−0.02
−0.01
0
0.01
0.02FFR
15 30 45 60−6
−4
−2
0
2
4x 10
−3 CPIUS
15 30 45 60−0.02
0
0.02
0.04
0.06
YUS
Ramirez-Rondan (BCRP) US QE and Peru May 22, 2014 16 / 28
Empirical strategyResponses after a QE shock
Figure: Peruvian responses after a QE shock; median value and 66% bands
15 30 45 60−1
−0.5
0
0.5
1TOT
15 30 45 60−1
−0.5
0
0.5
1RER
15 30 45 60−0.2
−0.1
0
0.1
0.2INT
15 30 45 60−0.5
0
0.5
1
CredFC
15 30 45 60−1
−0.5
0
0.5
CredDC
15 30 45 60−0.1
−0.05
0
0.05
0.1
0.15CPI
15 30 45 60−0.6
−0.4
−0.2
0
0.2
0.4GDP
Ramirez-Rondan (BCRP) US QE and Peru May 22, 2014 17 / 28
Counterfactual analysisThe setup
Pesaran and Smith (2012) define a “policy effect” relative to the counter-factual of “no policy scenario”.
Suppose that the policy intervention is announced at the end of theperiod T for the periods T + 1,T + 2, ...,T + H.
The intervention is such that the “policy on” realized values of thepolicy variable are different from the “policy off” counterfactual values(what would have happened in the absence of the intervention).
Ramirez-Rondan (BCRP) US QE and Peru May 22, 2014 18 / 28
Counterfactual analysisThe setup
ΩT = xt for t = T ,T − 1,T − 2, ... is the information set availableat time t.
Let mt be the policy variable.
The realized policy values are:ΨT+h(m) = mT+1,mT+2, ...,mT+h.
The counterfactual policy values are:ΨT+h(m0) = m0
T+1,m0T+2, ...,m
0T+h.
Ramirez-Rondan (BCRP) US QE and Peru May 22, 2014 19 / 28
Counterfactual analysisEx-ante policy evaluation
Compare the effects of two alternative sets of policy values: ΨT+h(m0)and ΨT+h(m1).
The ex-ante effect of the “policy on” ΨT+h(m1) relative to “policyoff” ΨT+h(m0) is given by:
dt+h = E (zt+h|ΩT ,ΨT+h(m1))− E (zt+h|ΩT ,ΨT+h(m0)), h = 1, 2, ...,H,(3)
where zt is one of the variables in the matrix xt (for example, inflation inPeru), except the policy variable(s).
Ramirez-Rondan (BCRP) US QE and Peru May 22, 2014 20 / 28
Counterfactual analysisCounterfactual scenario
Figure: U.S. M1 Money Stock
2000
2200
2400
2600
2800
US M1 Money stock
Counterfactual scenario for QE1
Counterfactual scenario for QE2, op. twist and QE3
1000
1200
1400
1600
1800
QE1 QE2 QE3Op.
twist
1000
ene-00 ene-01 ene-02 ene-03 ene-04 ene-05 ene-06 ene-07 ene-08 ene-09 ene-10 ene-11 ene-12 ene-13
Ramirez-Rondan (BCRP) US QE and Peru May 22, 2014 21 / 28
Counterfactual analysisEx-ante results
Table: QE effects throughout the U.S. M1 in the U.S. (keeping low the FEDinterest rate)
QE ex-ante effectMedian 66% lower 66% upper
QE1 bound bound
M1 Money stock (% change) 8.23 – –FED interest rate (p.p) 0.00 – –Term spread (p.p) -0.19 -0.20 -0.17Inflation rate (%) 0.95 0.92 0.97Industrial production (%) 2.43 2.32 2.54
Ramirez-Rondan (BCRP) US QE and Peru May 22, 2014 22 / 28
Counterfactual analysisEx-ante results
Table: QE effects throughout the U.S. M1 in Peru (keeping low the FED interestrate)
QE ex-ante effectMedian 66% lower 66% upper
QE1 bound bound
Terms of trade (% change) 5.51 5.16 5.83Exchange rate (% change) -3.19 -3.39 -2.94Interest rate (p.p) -0.29 -0.35 -0.25Credit in U.S. dollars (%) 6.41 6.13 6.65Credit in Soles (%) 4.72 4.48 4.95Inflation rate (%) 0.48 0.43 0.53Activity growth (%) 0.21 0.11 0.35
Ramirez-Rondan (BCRP) US QE and Peru May 22, 2014 23 / 28
Conclusion
Our results suggest small effects of US QE on key macroeconomicvariables.
The increase in international liquidity seems to transmit effects over themacro-economy through channels such as interest rates, credit growth,and exchange rate.
But, we find not significant effects on inflation and economic growthin Peru.
In that regard, our prior is that the central bank anticipated most ofthose effects and adopted macroprudential policies that mitigate anynegative effect that may spread over the whole Peruvian economy.
Ramirez-Rondan (BCRP) US QE and Peru May 22, 2014 24 / 28
Conclusion
Figure: Reserve requirements
Ramirez-Rondan (BCRP) US QE and Peru May 22, 2014 25 / 28
Conclusion
Figure: Forex market interventions
Ramirez-Rondan (BCRP) US QE and Peru May 22, 2014 26 / 28
Agenda
Portfolio re-balancing channel, emerging market bonds are imperfectsubstitutes of bonds issued by advanced economies. Higher demand foremerging market bonds and lower long term interest rates.
Signaling channel operates through the effect on agents’ expectations.Expectations of low short term interest rates to stay low in the nearfuture. Which implies a perception of low recovery of the economy.
Include macroprudential variables: reserve requirements and forex mar-ket interventions (control of exchange rate variability); which mighttend to mitigate most of the transmission mechanism.
Ramirez-Rondan (BCRP) US QE and Peru May 22, 2014 27 / 28
END
Ramirez-Rondan (BCRP) US QE and Peru May 22, 2014 28 / 28