Journal of the International Academy for Case Studies (Print ISSN: 1078-4950; Online ISSN: 1532-5822)


Capital Flows Response to U.S. Quantitative Easing and Capital Market Frictions: The Case of Emerging Countries

Author(s): Gallas Ameni, LabidiMoez, Nadia Mansour

This paper explores empirically the effect of US unconventional monetary policy on capital flows into emergent countries between 2000 and 2016. Also, the important factors which influence the international portfolio after the financial instability and with the presence of capital market frictions. Using exogenous and endogenous variables as determinants of capital flows, we tested a series of dynamic panel regression models that includes treasuries purchases and long interest rate as explanatory variables. The estimation of equations was done with the general method of moments (GMM), a technic that allows controlling the problem of endogeneity using several variables as instruments. The dynamic panel estimation results show that external factors had an important impact on capital inflows to EMEs. The degree of capital frictions between these economies and the United States is significant in explaining capital flows and heterogeneity across countries following unconventional asset purchases by advanced economies. This study was only focused on five emerging economies which are characterized all by fragile fundamentals and a reliance on foreign investment as one of the representative groups that capture the capital flows dynamically to this country destination. This highlights that the US unconventional monetary policy plays an important role in the fluctuation of the international flows, particularly in emerging economies but with substantial heterogeneity. The degree of capital market frictions between the two economies is statistically significant in explaining this observed heterogeneity. This paper contributes soo to knowledge in this field. Future Frameworks of capital market frictions in association with quantitative easing on EME currency, equity prices, and long-term sovereign bond market are worth doing to identify the heterogeneous implications in macroeconomic level.

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