Responding to QE taper from the receiving end

Abstract

This paper analyses the spillovers of quantitative easing (QE) and their taper in India, as there could be country-specific nuances that qualify the inferences thrown up by cross-country studies, and therefore, can enrich and empower the on-going debate. Using a combination of event study analyses, generalized method of moments and VAR estimates, it finds that QEs have significantly altered monetary conditions in India. Among the QEs, QE1 had the largest impact and taper announcement had a strong negative impact, with the spillovers working mainly through the portfolio rebalancing channel, followed by the liquidity channel. Going forward, emerging economies are likely to take into account these spillovers in the conduct of monetary policy, with implications for both policy autonomy and global welfare.

Keywords:

• unconventional monetary policy
• quantitative easing
• capital flows
• event study
• vector auto regression

JEL classification:

• E43
• E44
• E52
• E58

Acknowledgements

The authors are grateful to Sitikantha Pattanaik, S M Lokare, Snehal Herwadkar and Abhilasha for their inputs in several ways ranging from sharing of data, providing of literature and helpful discussions. The views expressed in this paper and all errors, whether of omission or commission, are to be attributed to the authors only. All the usual disclaimers apply.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Following Eichengreen and Gupta (2013).

2. The event study was also conducted using a 1-day window for robustness tests.

3. Two periods were selected for the distribution of normal returns – April 2007 to March 2008 which preceded the global financial crisis, and the period from January 2007 to February 2014 covering the period of the crisis and its aftermath.

4. Explanations of Shapiro–Wilk test and Wilcoxon signed rank test are provided in Appendices 3 and 4, respectively.

5. ‘Per-dollar’ comparison puts all UMPs on a common comparable footing. It is obtained by dividing the cumulative impact of each QE/taper by the amount of QE/taper, multiplied by 100.

6. For lag length selection, we followed a modified general-to-specific method starting with a maximum lag length of six to conserve degrees of freedom, being monthly data spanning from January 2002 to January 2014. The insignificant lags were then progressively removed till the final reported results were obtained.

7. For lag length selection procedure, see footnote 6.

8. It may be noted that changes in the tax laws during the estimated period would have had impacted the FII flows to India. However, due lack of a proper proxy variable readily available with the authors, this impact could not be captured directly. To this extent, the interpretation of the results would be with this caveat.

9. It may be noted that the results from the VAR are not central to purpose of this paper. However, it enables validating the role played by push and pull factors, and the standard three channels of transmission in a dynamic interaction framework that a VAR model allows unlike in the case of event study analysis and GMM.

10. The confidence intervals of impulse responses are not reported for legibility purpose. However, they are available from the authors on request.

Additional information

Notes on contributors

Michael Debabrata Patra

Michael Debabrata Patra, a career central banker since 1985, has worked in various positions in the Reserve Bank of India and is currently Executive Director. He has worked in the International Monetary Fund during December 2008 to June 30, 2012. His book entitled “The Global Economic Crisis through an Indian looking glass” vividly captures this experience. He has also published papers in the areas of inflation, monetary policy, international trade and finance, including exchange rates and the balance of payments. A Fellow of the Harvard University where he undertook post doctoral research in the area of financial stability, he has a Ph.D. in Economics from the Indian Institute of Technology, Mumbai.

Jeevan Kumar Khundrakpam

Jeevan Kumar Khundrakpam is an economist in the Reserve Bank of India since 1992, holding various research positions, and currently is Director in the Monetary Policy Department. His research interests and publications have been in the areas of fiscal policy, monetary policy and exchange rate pass-through. He did master and M Phil from Jawaharlal Nehru University, New Delhi, and was a visiting fellow in the Bank for International Settlement, Basel, Switzerland.

S Gangadaran

S Gangadaran currently works as an Assistant Adviser in the Monetary Policy Department, Reserve Bank of India. He obtained his master degree in statistics from Annamalai University and an M. Phil from Madras University. His research area has been mainly in monetary policy related issues such as on monetary policy transmission and optimal policy rules.

Rajesh Kavediya

Rajesh Kavediya is currently working as Assistant Adviser in the Monetary Policy Department of the Reserve Bank of India from July 2012. He completed his Master degree in Statistics in 1997 and also received Master of Philosophy degree in Statistics in 2002 from University of Pune, India. His current research interest is in the area of monetary policy operating framework and liquidity management.

Jessica M. Anthony

Jessica M. Anthony, since 2012, has been working as a research officer in the Monetary Policy Department of Reserve Bank of India. Her current area of work is on the global monetary policy spillovers. She completed her masters in economics in 2010 from Jadavpur University, Calcutta, India.