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Global Liquidity, cross-border flows, and

QE spillovers

Feng ZHU (Bank for International Settlements)

Singapore, 19 July 2013

Disclaimer: views expressed belong to the author alone and do not reflect those of the BIS.

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Outline

Crisis, unconventional monetary easing and expanding global

official liquidity

Recent developments in cross-border banking flows: global

private liquidity

Spillovers to EMEs of QE in advanced economies

Policy implications

Macro and financial stability

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Global official liquidity: the great monetary easing

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Global private liquidity: credit to the private sector As a percentage of GDP; unweighted averages

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Global spillovers: transmission channels?

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Global bank credit aggregates By borrower region, at constant end-Q4 2012 exchange rates

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Cross-border flows: some recent developments

Cross-border claims fell in 2012 Q4 by $345 bn (1.2% Q/Q)

Sharp decline in cross-border interbank lending ($467 bn,

2.6%) offset higher cross-border credit to non-banks

Borrowers in adv. economies (US, Europe) most affected

Claims on EM borrowers rose ($43 bn, 1.4%), mostly on banks

Claims on Asia-Pacific rose most, China accounted for ½

Banks also expanded local operations in EMEs

Cross-border bank lending

Far more volatile than other flows & domestic credit

Low interest rates globally

Corporations lock in cheap funding

Global interest rate risks

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Growth in international claims Year-on-year rate

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Growth rates of cross-border claims on EM residents In per cent

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Bond issuance By original maturity

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Spillovers to EMEs of QE in advanced economies

Chen, Filardo, He and Zhu (2011, 2013)

Does QE have significant cross-border spillovers?

Announcement effects in financial markets

Global VAR: longer-term impact on economy

Can QE spillovers be harmful?

Business cycle in EMEs: growth and inflation

Financial cycles in EMEs: FX, capital flows, credit, asset

markets

Impact of QE Tapering and eventual exit?

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Announcement effects of Federal Reserve QE

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Global VAR: 2-year cumulative impact Impulse responses from US term spread (23 bps) and risk spread (28 bps)

• US QE has greater impact on a number

of emerging economies than on US

domestic economy

• US risk spread reduction tends to have

considerable expansionary impact on

most EMEs.

• Impact of US term spread shock weaker

and more diverse across countries

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Global VAR: 2-year cumulative impact Impulse responses from US term spread (23 bps) and risk spread (28 bps)

• Term Spread reduction leads to persistent

asset price boom, while boom after a risk

spread reduction is relatively short-lived.

• Risk spread tends to increase bank credit

and exert greater currency appreciation

pressure.

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Bank Credit

risk

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Perc

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Stock Price

risk

term

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US UK JP XM TH HK IN MY KR SG CN ID PH CL MX AR BR

Perc

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Foreign Exchange Pressure

risk

term

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Market impact of Bank of Japan announcement In per cent

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Federal Reserve QE tapering:

Global equity prices and volatility

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VIX volatility and EME equity and bond fund flows

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Conclusion

Financial and business cycles increasingly global: liquidity flows

around

Cross-border flows large and volatile, recently declined in

advanced economies but increased in most EMEs

QE in advanced economies had significant spillovers

Be ware of QE Tapering and … exit

Need to understand better the strength and channels of

transmission of QE (and its exit) to EMEs

Financial stability and macro-prudential tools