Oecd amro s1 02_bis mr feng zhu

Restricted

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.

Restricted 2

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

Restricted 3

Global official liquidity: the great monetary easing

Restricted 4

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

Restricted 5

Global spillovers: transmission channels?

Restricted 6

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

Restricted 7

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

Restricted 8

Growth in international claims Year-on-year rate

Restricted 9

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

Restricted 10

Bond issuance By original maturity

Restricted 11

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?

Restricted 12

Announcement effects of Federal Reserve QE

Restricted 13

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

Restricted 14

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.

-6

-4

-2

0

2

4

6

8

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

Perc

ent

Bank Credit

risk

term

-20

-15

-10

-5

0

5

10

15

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

Perc

ent

Stock Price

risk

term

-15

-10

-5

0

5

10

15

20

25

30

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

Perc

ent P

oint

Foreign Exchange Pressure

risk

term

Restricted 15

Market impact of Bank of Japan announcement In per cent

Restricted 16

Federal Reserve QE tapering:

Global equity prices and volatility

Restricted 17

VIX volatility and EME equity and bond fund flows

Restricted 18

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