Unconventional monetary policy tools (UMPTs) of central banks in emerging markets and developing economies (EMDEs) during the COVID-19 crisis

Abstract

There are multiple transmission channels that trigger spillover effects to the EMDEs when the UMPTs are deployed by AEs. Fratzscher et al. (2012) analyze the significant spillovers of the Federal Reserve’s unconventional monetary policy measures upon the EMDEs during the GFC crisis. Their analysis reveals that the Fed policies functioned in a pro-cyclical manner for capital flows to the EMDEs and in a counter-cyclical manner for the US, triggering a portfolio rebalancing across countries out of EMEs and into US equity and bond funds under QE1, and in the opposite direction under QE2. Lim and Mohapatra (2016) also examine the gross financial flows to developing countries between 2000 and 2013 as a result of the quantitative easing policies in the US and other developed countries. Their analysis reveals evidence of potential transmission of QE along the channels of liquidity, portfolio balancing, and confidence. Thus, the financial flows to developing economies in times of a crisis like COVID-19 are not only influenced by the UMPTs deployed by the respective central bank but also by those deployed by the developed nations.