Market Financial Distress: The State-Dependent Effects of Fed Asset Purchases on Emerging Economies [PDF]
Abstract. This paper explores whether the spillover effects of U.S. LSAPs on EMEs are amplified during periods of global financial market distress. Using LSAP shocks identified by Swanson (2021), a panel of EMEs, and a smooth transition local projection model, I allow the impact of the U.S. unconventional monetary policy to vary with the degree of global financial market tensions. Under financial market stress, LSAP expansions improve global market conditions and quickly reduce risk aversion, boost capital inflows from the U.S., and enhance financial and real conditions in EMEs for over a year. These results are about twice as large as those from a linear model. In contrast, under stable market conditions, LSAP expansions lead to milder and short-lived impacts, with global risk aversion, real activity, and country spreads moving in the opposite direction in the early months. The difference between market regimes may stem from a nonlinear international risk-taking channel influenced by changes in risk aversion, confidence, and economic expectations among market participants. Lastly, LSAP effects are stronger internationally than in the U.S., exceeding other asymmetries like sign-dependent effects.
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