Quantitative Easing,
Portfolio Choice and
International Capital Flows
Comment by
Eduardo Fernández-Arias
(personal views)
Conference Debt and Credit,
Growth and Crises
Madrid, June 2012
What the paper does: many firsts
• Estimates impacts of various US Fed QE actions
on portfolio allocations (Q) and prices (P) across
asset classes (equity and bonds), and XR.
• Distinguishes between announcements and
operations
• Estimates spillovers to EME and AE of each
impact.
• Analyzes cyclicality of effects for EME, AE, US
Main empirical findings of the paper as to the
international effects of Quantitative Easing
• Actual operations are more important than
announcements - will question
• Portfolio effects across countries more important
than those across (US) asset classes – will ask
for clarification
• Effects on prices more important than on financial
flows – will ask for clarification
• Procyclical effects on EM (and countercyclical on
US) – will highlight
Outline
1. Empirical exercise
2. Interpretation of empirical results
3. Revisit findings
1. Empirical Exercise. Some suggestions
• Main comment: Announcements as dummies (no
size) biases effect towards zero. Suggestions:
– Interact dummy with operation size
– Add up announcement and operation effects
• Flow (Q) effects may require lags (new issuance)
• Test sign of gamma (EME). Low and negative
results for bond inflows; organize and test
separate effects
• Show that country effects do cluster in EME to
validate panel groupings
2. Interpretation of Empirical Results: not able
to tease out policy channels
• Channels underlying empirical results
– Portfolio rebalancing to compensate shock to
financial supply (needs a model; next)
– Signaling of future policy (unclear how to map QE
action to future stance)
– Liquidity (is it recovered in operation effect?)
– Confidence (belief that policy will improve economy)
• Add to “confidence” lower credit risk due to higher
collateral values (P) for stocks and junk bonds
2. Interpretation of Results: Needs a general
equilibrium portfolio model
• Signs of effects through various channels in
table 4 not obvious to me
• Some elements in a model to study QE shock:
– Effect on Q (credit easing) is higher the closer the
substitute and possibly ambiguous for others
– Effect on P (collateral values) is the opposite
– Need to consider demand and supply elasticities;
reallocations require modeling new issuances
• Perhaps this may help teasing out channels.
3. Revisiting Findings
• Actual operations are more important than
announcements – dummy not enough
• Portfolio effects across countries more important
than those across (US) asset classes – true for
EMs? makes sense? formalize metrics and test
• Effects on prices more important than on
financial flows – discuss supply elasticity
• Procyclical effects on EM (and countercyclical
on US) – move to abstract, it is key (next)
Key finding of the paper: there are important
international spillovers of QE of interest of G20
• Especially true for the asymmetric cyclical effects
• Issues to extend the discussion
– How would capital controls interact with QE? May
them be countercyclical for all for capital account?
– If capital controls are a form of protectionism due
to effect on XR, so is credit easing
– There may be room for a grand bargain to allow
credit easing and regulate capital controls in
exchange for international financial safety net