International uncertainty shocks and central bank quantitative easing under supply shocks

Abstract

Abstract. This study examines the impact of shocks to economic instability in countries with quantitative easing policies. We estimate a global VAR with time-varying parameters using Bayesian techniques (TVP-GVAR-FSVM). We estimate Nelson-Siegel, a variable related to the yield curve, and find no significant difference in the results whether it is included or not in the VAR model; as a result of the change from a primarily demand-driven shock before 2020 to a supply shock after 2020, the shock to instability is amplified. Volatility shocks were amplified. We further examined the trends in changes in interest rates, exchange rates, long- and short-term interest rate differentials, and economic instability from three perspectives: first, developing versus non-developing countries; second, resource-exporting versus non-resource-exporting countries; and third, countries like Japan, which employs yield curve control, and other countries Third, whether the type of quantitative easing policy differs from that of other countries, such as Japan, which uses yield curve control. Daily data on exchange rates and long- and short-term interest rate differentials revealed commonalities among resource-exporting countries. The TVP-GVAR-FSVM estimation results also showed that the consumer price index has shown common movements in developing countries, especially resource-exporting countries, in recent years. The effect on the unemployment rate also showed movements specific to developed countries, but no commonalities were found among countries in other variables. Compared to resource-importing countries, resource-exporting countries' increased profits due to higher resource prices after the war in Ukraine served as a cushion due to the instability in the global economy and weakened the negative impact on their economies. However, for developing resource-importing countries, shocks to economic stability caused significant volatility. A common feature of countries that have switched to interest rate policies is that prices have very high rates of increase. In addition, the rise in yield curve variables suppressed consumer prices and raised stock prices. Countries that experienced a sustained narrowing of the long/short interest rate differential theoretically resulted in a flattening of the yield curve but also resulted in currency appreciation.

Keywords. Quantitative easing; International uncertainty shocks; TVP-GVAR-FSVM; Resource countries; Developing countries.

JEL. C52; L25; M14.