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January 16, 2014

'The Potential Effects of QE on Gross Financial Flows to Developing Countries'

Jamus Jerome Lim (World Bank), Sanket Mohapatra (World Bank), and Marc Stocker (World Bank), at econbrowser:
Guest Contribution: "Understanding the Potential Effects of QE on Gross Financial Flows to Developing Countries": In late November 2008, the Federal Reserve announced the first of a series of unconventional monetary policies---quantitative easing (QE)---which, by the beginning of 2014, had swelled its balance sheet to an unprecedented $4 trillion. Although QE was primarily designed to stimulate the U.S. economy, the program was far from innocuous for developing countries; faced with near-zero returns in the U.S. and other high-income countries (many of which were pursuing unconventional monetary policies of their own), financial capital began searching for alternative sources of yield, for which emerging economies were well-poised to offer.
In a background paper written for the thematic chapter of the recently-released Global Economic Prospects, we probe the question of whether QE had an effect on gross financial flows to developing countries. ...
Our baseline estimates place the lower bound of the effect of QE at around 3 percent of gross financial inflows, for the average developing economy. ... Overall, the effects of unconventional monetary policy, insofar as its impact on gross financial inflows, appears to be measurable and nontrivial. However, to the extent that QE appears to operate primarily via portfolio inflows to the largest emerging markets (rather than FDI), the broader benefits of QE for development finance are more likely to be second-order (relaxing financing constraints for firms able to access bond markets, enhancing liquidity in developing-country financial markets, and promoting overall financial development), and may also be more exposed to the risk of sudden reversals.

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