Publication Date: December 2018
The steady application of Quantitative Easing (QE) has been followed by big and non-monotonic eﬀects on international asset prices and international capital flows. These are diﬀicult to explain in conventional models, but arise naturally in a model with collateral. This paper develops a general-equilibrium framework to explore QE’s international transmission involving an advanced economy (AE) and an emerging market economy (EM) whose assets have less collateral capacity. Capital flows arise as a result of international sharing of scarce collateral. The crucial insight is that private AE agents adjust their portfolios in diﬀerent ways in response to QE, conditional on whether they are (i) fully leveraged, (ii) partially leveraged or (iii) unleveraged. These portfolio shifts of international assets can diminish or even reverse the eﬀectiveness of ever-larger QE interventions on asset prices. The model provides a simultaneous interpretation of several important stylized facts associated with QE.
Keywords: Quantitative easing, Collateral, Leverage, Financial spillovers, Emerging markets, Capital flows
JEL Classification Codes: D52, D53, E32, E44, E52, F34, F36, G01, G11, G12