A Comparison between the Effects of Fed’s Quantitative Easing and Quantitative Tightening Policies: Evidence of Fragile Five, 2008-2018
After the latest global financial crisis, The U.S Federal Reserve Bank took extraordinary measures to achieve recovery in the financial markets. The U.S Federal Reserve Bank started to apply Quantitative Easing (QE) policies by cutting interest rates and purchasing into large-scale assets. From 2008 to mid-2013, FED has created an abundance global liquidity, which were stimulating a substantial economic improvement in both developed and emerging countries. FED reduced its purchasing program to zero by 2014. Federal Reserve Bank announced to stop its asset purchase programs and, to shrink its balance sheet and to take money out of the financial system. FED started Quantitative Tightening (QT) is a contractionary monetary policy that is the reverse of QE. The main goal of this paper is to compare the effects between QE and QT on fragile five, including Brazil, India, Indonesia, South Africa and Turkey. We estimate spillover effects of FED’s policies on Fragile Five, using Panel Vector Auto regression (PVAR) model. We also used monthly financial data from January 2008 to October 2018.We are mainly focusing on the consequences of changes in Fed’s policies on the fragile five’s basic financial indicators; the US dollar exchange rate, long term interest rate, stock prices and capıtal flows. The results show that a contractionary the US QT has affected financial variables in the Fragile Five, causing exchange rate depreciation, a reduction in long-term bond returns, and decrease in capital inflows to these countries. These effects on financial variables are stronger in Turkey compared to other Fragile Five. The Turkish lira was the most negatively affected by the FED’s QT.
Keywords - Unconventional monetary policy, Quantitative Tightening, FED, Fragile Five, PVAR
JEL Codes - C31, E44, E52, F42