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Empirical Economics

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18-05-2021

How does unconventional monetary policy affect the global financial markets?

Authors: Tomoo Inoue, Tatsuyoshi Okimoto

Published in: Empirical Economics | Issue 3/2022

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Abstract

This paper examines the spillover effects of unconventional monetary policies (UMPs) by the Bank of Japan (BOJ) and the Federal Reserve (Fed) on the domestic and global financial markets, taking a possible regime change into account. Applying a smooth-transition global VAR model to ten countries and the Euro zone for the sample period between 2002–2015, we find that the BOJ’s expansionary UMPs have significantly increased the equity prices and depreciated the exchange rates, regardless of the regimes. Also, our results indicate that the BOJ’s UMPs have become more effective for the government and corporate bond prices in more recent years. In addition, we find that the Fed’s expansionary UMPs have had significant positive effects on their domestic financial markets throughout the sample period. Finally, our results suggest that the BOJ’s UMPs have rather limited effects on global financial markets and that the effects of the Fed’s UMPs are considerably larger.

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See Franses and van Dijk (2000) and van Dijk et al. (2002) for the details on smooth-transition models.

The model is also estimated by using an asset-based weight. The results, such as the selected lag lengths, the timing of regime change, and the shape of the impulse response functions, are qualitatively unaffected by the choice of the weight matrix. We appreciate the referee’s suggestion to confirm this point.

Note that the responses of the US financial market indices are all zero, due to the specification of the US VAR model. As we noted in Table 3, the US market is treated as independent.

To save space, we did not report the GIRs for the global financial markets, but they are also qualitatively identical to those reported in Sects. 4.1 and 4.2 and available from authors upon request.

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Title: How does unconventional monetary policy affect the global financial markets?
Authors: Tomoo Inoue
Tatsuyoshi Okimoto
Publication date: 18-05-2021
Publisher: Springer Berlin Heidelberg
Published in: Empirical Economics / Issue 3/2022
Print ISSN: 0377-7332
Electronic ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-021-02067-7

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