The Use of Unconventional Monetary Policy in Emerging Market Economies

Abstract

This paper investigates the use of unconventional monetary policy, quantitative easing (QE) in emerging market economies (EMEs). This study establishes conditions under which emerging economies may follow to implement QE without being exposed to the risks associated with the use of QE, which include fiscal dominance and the loss of central bank independence and credibility. We also analyse the impact of the programme on bond yields, stock markets and the banking industry a few months after the announcement. We provide empirical evidence using the event study and basic vector autoregression (VAR) method with monthly data from January 2011 to December 2021 to estimate the effects of QE on domestic financial markets during the Covid-19 pandemic. We find that QE effectively lowered bond yields and positively affected financial markets; however, the impact on stocks and banks was not as significant as the bond market. The impact on bond yield is identified through the signalling channel, and on other financial markets is through the portfolio-rebalance channel.