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How does unconventional monetary policy affect the global financial markets?

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Abstract

This paper examines the spillover effects of unconventional monetary policies (UMPs) by the Bank of Japan (BOJ) and the Federal Reserve (Fed) on the domestic and global financial markets, taking a possible regime change into account. Applying a smooth-transition global VAR model to ten countries and the Euro zone for the sample period between 2002–2015, we find that the BOJ’s expansionary UMPs have significantly increased the equity prices and depreciated the exchange rates, regardless of the regimes. Also, our results indicate that the BOJ’s UMPs have become more effective for the government and corporate bond prices in more recent years. In addition, we find that the Fed’s expansionary UMPs have had significant positive effects on their domestic financial markets throughout the sample period. Finally, our results suggest that the BOJ’s UMPs have rather limited effects on global financial markets and that the effects of the Fed’s UMPs are considerably larger.

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Notes

  1. See Franses and van Dijk (2000) and van Dijk et al. (2002) for the details on smooth-transition models.

  2. The model is also estimated by using an asset-based weight. The results, such as the selected lag lengths, the timing of regime change, and the shape of the impulse response functions, are qualitatively unaffected by the choice of the weight matrix. We appreciate the referee’s suggestion to confirm this point.

  3. Note that the responses of the US financial market indices are all zero, due to the specification of the US VAR model. As we noted in Table 3, the US market is treated as independent.

  4. To save space, we did not report the GIRs for the global financial markets, but they are also qualitatively identical to those reported in Sects. 4.1 and 4.2 and available from authors upon request.

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Acknowledgements

The authors thank Ryuzo Miyao, Hirokuni Iiboshi, Masaya Sakuragawa, Junko Koeda, Sophia Dimelis, participants at 2017 Nippon Association Annual Meeting, 2017 Japanese Economic Association Autumn Meeting, ICMMA2018, and 2019 Western Economic Association International, and seminar participants at the Australian National University, Keio University, Seikei University, and Research Institute of Economy, Trade and Industry (RIETI) for helpful comments and suggestions. The authors would also like to thank Kotaro Hamano for providing excellent research assistance. A part of this study is a result of a research Project at the RIETI by the second author. The sovereign and corporate bond price indices are kindly provided from S&P Dow Jones Indices LLC.

Funding

This research is partially funded by the Research Grants from The Japan Securities Scholarship Foundation (Number 16-002).

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Authors and Affiliations

  1. Faculty of Economics, Seikei University, 3-3-1 Kichijoji-Kitamachi, Musashino, Tokyo, 180-8633, Japan

    Tomoo Inoue

  2. Australian National University and RIETI, 132 Lennox Crossing, ANU, Acton, ACT, 2601, Australia

    Tatsuyoshi Okimoto

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  1. Tomoo Inoue
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Correspondence to Tatsuyoshi Okimoto.

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Tomoo Inoue and Tatsuyoshi Okimoto declare that they have no conflict of interest.

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Inoue, T., Okimoto, T. How does unconventional monetary policy affect the global financial markets?. Empir Econ 62, 1013–1036 (2022). https://doi.org/10.1007/s00181-021-02067-7

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