Foreign Exchange and Global Monetary Shocks: The Asymmetric Effects of Advanced Economies’ Quantitative Easing on Exchange Rate Volatility in Emerging Markets

Abstract

This research assesses the impact of global monetary shocks stemming from quantitative easing policies in advanced economies on exchange rate volatility in emerging markets. Using panel ARDL (Autoregressive Distributed Lag) model, an asymmetric effect is detected showing that increases in quantitative easing have a significant impact on exchange rate volatility, whereas subsequent tapering does not. Moreover, the Fragile Five economies experience spikes in exchange rate volatility that are more than double what is detected in other emerging markets. Finally, the impact of foreign exchange intervention to offset the effect on volatility is significant across emerging markets and is, once again, larger in the Fragile Five economies. The results are supported using panel VAR (Vector Autoregression) estimations.

KEYWORDS:

• Exchange rate volatility
• quantitative easing
• emerging markets
• spillover effects

JEL:

• E52
• F31
• F42
• F65

Disclosure statement

We wish to confirm that there are no known conflicts of interest associated with this publication and there has been no significant financial support for this work that could have influenced its outcome. We confirm that the manuscript has been read and approved by all named authors and that there are no other persons who satisfied the criteria for authorship but are not listed.

Notes

1 Authors calculations of the sum of changes in the monetary base across the United States, United Kingdom, European Union and Japan from October 2008 (QE1) to December 2013, when tapering of QE was announced by the Federal Reserve.

2 Please refer to Bahmani-Oskooee and Saha (2016), Bahmani-Oskooee and Bahmani (2015) and Shin et al. (2014) for details.

3 Please refer to Pesaran et al. (2001) for details.

4 Gygli et al. (2019) KOF Globalization Index

5 The results presented employ the PMG estimation, and represent the long run results. The MG results are available upon request, and remain consistent with the PMG results.

6 Full results available upon request.

Additional information

Notes on contributors

Helena Glebocki Keefe

Dr. Helena Glebocki Keefe is Assistant Professor of Economics at Fairfield University. Her scholarly interests are in the fields of international economics, emerging markets, foreign exchange and international finance.

Sujata Saha

Dr. Sujata Saha is Assistant Professor of Economics at Wabash College. Her scholarly interests are international finance and trade and open economy macroeconomics.