International capital market frictions and spillovers from quantitative easing

This paper analyzes the impact of large-scale, unconventional asset purchases by advanced country central banks on emerging market economies (EMEs) during 2008–2014. I show that there was substantial heterogeneity in the way EME currency, equity, and long-term sovereign bond markets were impacted by these purchases. Drawing on the gravity-in-international- finance literature, I show evidence that the degree of economic integration between EMEs and advanced countries is able to explain some of the observed heterogeneity in how these asset prices were affected. This result is robust to considerations of the domestic monetary policy, exchange-rate regime, and capital control policies in EMEs. Furthermore, I show that the size and direction of asset price movements in EMEs depended both on the type of assets purchased and on whether it was the US Federal Reserve or other advanced country central banks engaging in the purchases.