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Research on the Liquidity Overflow Effect of Quantitative Easing Monetary Policy

Author: HouPeng
Tutor: JiangDianChun
School: Nankai University
Course: World economy
Keywords: quantitative easing monetary policy excess liquidity "hot money"sterilization operation
CLC: F821.0
Type: PhD thesis
Year: 2013
Downloads: 95
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Since the subprime mortgage crisis broke in2007, west developed countries which led by U.S. reduced their benchmark interest rate continuously, in order to stimulate economic recovery. When the short-term rates close to zero, conventional monetary policy near the time of failure, economy of these countries sank into the "Liquidity Trap". At the moment, the United States, European Union, Japan and other developed countries tried to implement quantitative easing monetary policy to create large quantities of money, restored the transmission mechanmism of conventional monetary policy and get rid of the "Liquidity Trap" by some unconverntional operations such as massive purchases of long-term bonds、MBS, intervention on loaning and so on. For four years, the quantitative easing monetary policy could work in stabilizing the financial order、managing inflation expectation and restoring loaning of financial institution. However, when the domestic real economy can not accommodate this part of the excess liquidity, it will inevitably lead to liquidity overflow effect triggering a great negative effect in other countries, especially in emerging market countries. In this paper, we will study in liquidity overflow effect and influence to emerging market countries’ inflation of quantitative easing monetary policy and check the validity of emerging market countries’ central bank’s policy.At first, we give the background of quantitative easing monetary policy of the United States、European Union and Japan in detail. Meanwhile, we also discuss these policies’ effect and find out their similarities and differences. Second, we analyse the overflow effect of these policies and point out that these "hot money" not only raise international commodity price, but also trigger a large number of international capital into emerging market countries, disturb the stability of financial market, and bring inflation to the emerging market economics. As a result, Xiaochuan Zhou, the governor of Chinese central bank presented his solution——"pool" theory which puts those "hot money" into foreign exchange reserve and takes a hedging operation to relieve the stress from national money passive supply. In the empirical part, we use the panel-VAR model to examine the shock to the BRICS from American quantitative easing since Novermber,2008. The result shows that American quantitative easing policy not only traggers international excess liquidity but also brings imported inflation to the BRICS. Meanwhile, because of devaluation expectation of dollar and faster recovery of emerging market countries, a large number of "hot money" flow to these countries. Passive money supply raises the inflation and limits the execution of monetary policy from national central bank. We also examine the effectiveness of Chinese central bank’s sterilization operation. The result shows that Chinese central bank’s sterilization operation can curb inflation, but hasn’t persistence due to cost of sterilization operation increasing as its scale.Basing on the conclusion, we present some proposal at last:speeding up the transition of economic growth style, reducing demands to major international commdity by improving the efficiency of the resource utilization; actively taking part in the pricing process of major international commdity; changing the traditional view to foreign capital inflow, encouraging competent enterprises investing in other countries; speeding up the process of RMB internationalization, supporting RMB as the method of payment in the international trade; loosening strict controls in capital and financial account gradually, permiting foreign bank to conduct RMB business, advancing the reform of interest rate and exchange rate system; strengthening the monitoring of international capital flows, especially keeping an eye on the inflows and outflows of "hot money".

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CLC: > Economic > Fiscal, monetary > Currency > World currency > Monetary policy
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