The Effect of Quantitative Easing on Financial Flows to Developing Countries

This paper examines the effects of quantitative easing (QE) policies in the United States on gross financial inflows to developing countries. Our results support the notion that QE may have been transmitted through liquidity, portfolio balancing, and confidence channels. Moreover, we find that QE had an additional effect over and above these observable channels , which we cannot attribute to either market expectations or changes in the structural relationships between inflows and the observable fundamentals. Our baseline estimates place the lower bound of the effect of QE at around 3 percent of gross inflows, for the average developing economy. We also find evidence of heterogeneity among different types of flows; portfolio (especially bond) flows tend to be more sensitive than FDI to our measured QE effects. Finally, we perform a simulations to explore the potential effects of QE withdrawal on financial flows to developing countries. Link to the article

LIM, J. and MOHAPATRA, S. (2016). The Effect of Quantitative Easing on Financial Flows to Developing Countries. Journal of International Money and Finance, 68(1), pp. 331-357.