The Liquidity Effect of the U.S. QE on Sovereign Yield Spreads of Commodity-Exporting Countries
Abstract
:1. Introduction
2. The Relationship of QE with Market Liquidity
3. Liquidity Channel
4. Data and Econometric Framework
4.1. The Relationship of the U.S. QE with the TIPS Liquidity Premium
- The nominal Treasury bond yields are very close to the unobservable frictionless nominal yields, hence, for all t and all relevant .
- TIPS are less liquid than nominal Treasury bonds with the presence of frictions. Thus, the observed TIPS yields, consists of both a time-varying liquidity premium, and a frictionless counterpart, , with for all t and all relevant .
- Inflation swaps are less liquid than nominal Treasury bonds with frictions. Hence, the observed inflation swap rates, , with for all t and all relevant .
4.2. The Relationship of the TIPS Liquidity Premium with Sovereign Yield Spreads
4.3. Diagnostic Tests
5. Findings and Discussions
5.1. The Liquidity Effect of the U.S. QE
5.2. The Relationship of the Liquidity Effect of the U.S. QE with Sovereign Yield Spreads
6. Conclusions and Implications of the Study
Author Contributions
Funding
Institutional Review Board Statement
Informed Consent Statement
Data Availability Statement
Acknowledgments
Conflicts of Interest
References
- Adrian, T.; Shin, H.S. Money, Liquidity, and Monetary Policy. Am. Econ. Rev. 2009, 99, 600–605. [Google Scholar] [CrossRef] [Green Version]
- Edey, M. The Global Financial Crisis and Its Effects. Econ. Pap. J. Appl. Econ. Policy 2009, 28, 186–195. [Google Scholar] [CrossRef]
- Committee on the Global Financial System. Global Liquidity—Concept, Measurement and Policy Implications; CGFS Papers No. 45; Committee on the Global Financial System: Basel, Switzerland, 2011. [Google Scholar]
- Loisel, O.; Mésonnier, J.S. Unconventional Monetary Policy Measures in Response to the Crisis; Banque de France Current Issues 1; Banque de France: Paris, France, April 2009. [Google Scholar]
- Belke, A.; Bordon, I.G.; Volz, U. Effects of global liquidity on commodity and food prices. World Dev. 2013, 44, 31–43. [Google Scholar] [CrossRef] [Green Version]
- Schwarz, K. Mind the gap: Disentangling credit and liquidity in risk spreads. Rev. Financ. 2019, 23, 557–597. [Google Scholar] [CrossRef]
- Krugman, P. Oil shocks and exchange rate dynamics. In Exchange Rates and International Macroeconomics; University of Chicago Press: Chicago, IL, USA, 1983; pp. 259–284. [Google Scholar]
- Malik, F.; Umar, Z. Dynamic connectedness of oil price shocks and exchange rates. Energy Econ. 2019, 84, 104501. [Google Scholar] [CrossRef]
- Umar, Z.; Aharon, D.Y.; Esparcia, C.; AlWahedi, W. Spillovers between sovereign yield curve components and oil price shocks. Energy Econ. 2022, 109, 105963. [Google Scholar] [CrossRef]
- Brunnermeier, M.K.; Pedersen, L.H. Market liquidity and funding liquidity. Rev. Financ. Stud. 2009, 22, 2201–2238. [Google Scholar] [CrossRef] [Green Version]
- Iwatsubo, K.; Taishi, T. Quantitative Easing and Liquidity in the Japanese Government Bond Market. Int. Rev. Financ. 2018, 18, 463–475. [Google Scholar] [CrossRef]
- Chari, A. Heterogeneous Market-Making in Foreign Exchange Markets: Evidence from Individual Bank Responses to Central Bank Interventions. J. Money Credit. Bank. 2007, 39, 1131–1162. [Google Scholar] [CrossRef]
- Brunetti, C.; di Filippo, M.; Harris, J.H. Effects of Central Bank Intervention on the Interbank Market during the Subprime Crisis. Rev. Financ. Stud. 2010, 24, 2053–2083. [Google Scholar] [CrossRef]
- Kandrac, J. Have Federal Reserve MBS Purchases Affected Market Functioning? Econ. Lett. 2013, 121, 188–191. [Google Scholar] [CrossRef]
- Kandrac, J. The Costs of Quantitative Easing: Liquidity and Market Functioning Effects of Federal Reserve MBS Purchases. Int. J. Cent. Bank. 2018, 14, 259–304. [Google Scholar] [CrossRef]
- Herbst, A.F.; Wu, J.S.; Ho, C.P. Quantitative Easing in an Open Economy—Not a Liquidity but a Reserve Trap. Glob. Financ. J. 2014, 25, 1–16. [Google Scholar] [CrossRef]
- Wong, W.; Mariscal, I.B.-F.; Yao, W.; Howells, P. Liquidity and Credit Risks in the UK’s Financial Crisis: How QE Changed the Relationship; UWE Economics Working Paper Series 1301; University of the West England: Bristol, UK, 2013. [Google Scholar]
- Caldentey, E.P. Quantitative Easing (QE), Changes in Global Liquidity, and Financial Instability. Int. J. Political Econ. 2017, 46, 91–112. [Google Scholar] [CrossRef]
- Kandrac, J.; Schlusche, B. Flow Effects of Large-Scale Asset Purchases. Econ. Lett. 2013, 121, 330–335. [Google Scholar] [CrossRef]
- Gagnon, J.; Raskin, M.; Remache, J.; Sack, B. The Financial Market Effects of the Federal Reserve’s Large-Scale Asset Purchases. Int. J. Cent. Bank. 2011, 7, 3–43. [Google Scholar]
- Bauer, M.D.; Rudebusch, G.D. The Signaling Channel for Federal Reserve Bond Purchases. Int. J. Cent. Bank. 2014, 10, 233–289. [Google Scholar] [CrossRef] [Green Version]
- Bauer, M.D.; Neely, C.J. International Channels of the Fed’s Unconventional Monetary Policy. J. Int. Money Financ. 2014, 44, 24–46. [Google Scholar] [CrossRef] [Green Version]
- Bernanke, B.S. Opening remarks: The economic outlook and monetary policy. In Proceedings of the Economic Policy Symposium, Jackson Hole, WY, USA, 26–28 August 2010; Federal Reserve Bank of Kansas City: Kansas City, MO, USA, 2010; pp. 1–16. [Google Scholar]
- Fratzscher, M.; Lo Duca, M.; Straub, R. On the International Spillovers of US Quantitative Easing. Econ. J. 2017, 128, 330–377. [Google Scholar] [CrossRef] [Green Version]
- Joyce, M.A.; Liu, Z.; Tonks, I. Institutional investors and the QE portfolio balance channel. J. Money Credit. Bank. 2017, 49, 1225–1246. [Google Scholar] [CrossRef]
- Goldstein, I.; Witmer, J.; Yang, J. Following the Money: Evidence for the Portfolio Balance Channel of Quantitative Easing (No. 2018-33). Retrieved from Bank of Canada Website. 2018. Available online: https://www.bankofcanada.ca/wp-content/uploads/2018/07/swp2018-33.pdf (accessed on 5 February 2018).
- Kozicki, S.; Santor, E.; Suchanek, L. Large-Scale Asset Purchases: Impact on Commodity Prices and International Spillover Effects (No. 2015-21). Retrieved from Bank of Canada Website. 2015. Available online: https://www.bankofcanada.ca/2015/06/working-paper-2015-21/ (accessed on 5 February 2018).
- Joyce, M.A.S.; Tong, M. QE and the gilt market: A disaggregated analysis. Econ. J. 2012, 122, 348–384. [Google Scholar] [CrossRef]
- Krishnamurthy, A.; Vissing-Jorgensen, A. The Effect of Quantitative Easing on Interest Rates: Channels and Implications for Policy. Brook. Pap. Econ. Act. 2011, 43, 215–287. [Google Scholar] [CrossRef] [Green Version]
- Christensen, J.H.; Gillan, J.M. Does quantitative easing affect market liquidity? J. Bank. Financ. 2022, 134, 106349. [Google Scholar] [CrossRef]
- Cashin, P.; Céspedes, L.F.; Sahay, R. Commodity Currencies and the Real Exchange Rate. J. Dev. Econ. 2004, 75, 239–268. [Google Scholar] [CrossRef] [Green Version]
- Fleming, M.; Krishnan, N. The Microstructure of the TIPS Market. FRBNY Econ. Policy Rev. 2012, 18, 27–45. [Google Scholar]
- Hu, G.X.; Pan, J.; Wang, J. Noise as Information for Illiquidity. J. Financ. 2013, 68, 2341–2382. [Google Scholar] [CrossRef] [Green Version]
- Stock, J.H.; Yogo, M. Testing for Weak Instruments in Linear IV Regression; NBER Technical Working Paper No. 284; National Bureau of Economic Research: Cambridge, MA, USA, October 2002. [Google Scholar]
- Durbin, J. Errors in Variables. Rev. L’inst. Int. Stat. 1954, 22, 23–32. [Google Scholar] [CrossRef]
- Wu, D.M. Alternative Tests of Independence between Stochastic Regressors and Disturbances. Econom. J. Econom. Soc. 1973, 41, 733–750. [Google Scholar] [CrossRef]
- Hausman, J.A. Specification Tests in Econometrics. Econom. J. Econom. Soc. 1978, 46, 1251–1271. [Google Scholar] [CrossRef] [Green Version]
- Gurkaynak, R.; Sack, B.; Wright, J. The TIPS Yield Curve and Inflation Compensation. Am. Econ. J. Macroecon. 2010, 2, 70–92. [Google Scholar] [CrossRef] [Green Version]
- Andreasen, M.M.; Christensen, J.H.; Riddell, S. The TIPS Liquidity Premium; FRBSF Working Paper No. 2017-11; Federal Reserve Bank of San Francisco: San Francisco, CA, USA, March 2018. [Google Scholar]
- Wright, J.H. What Does Monetary Policy Do to Long-Term Interest Rates at the Zero Lower Bound? Econ. J. 2012, 122, F447–F466. [Google Scholar] [CrossRef]
- Altavilla, C.; Giannone, D.; Lenza, M. The Financial and Macroeconomic Effects of OMT Announcements; ECB Working Paper No. 1707; European Central Bank: Frankfurt, Germany, August 2014. [Google Scholar]
- Rey, H. Dilemma Not Trilemma: The Global Cycle and Monetary Policy Independence; NBER Working Paper No. 21162; National Bureau of Economic Research: Cambridge, MA, USA, May 2015. [Google Scholar]
- Rey, H. International Channels of Transmission of Monetary Policy and the Mundellian Trilemma. IMF Econ. Rev. 2016, 64, 6–35. [Google Scholar] [CrossRef] [Green Version]
- Baumeister, C.; Benati, L. Unconventional Monetary Policy and the Great Recession: Estimating the Macroeconomic Effects of a Spread Compression at the Zero Lower Bound. Int. J. Cent. Bank. 2013, 9, 165–212. [Google Scholar]
- Bowman, D.; Londono, J.M.; Sapriza, H. US Unconventional Monetary Policy and Transmission to Emerging Market Economies. J. Int. Money Financ. 2015, 55, 27–59. [Google Scholar] [CrossRef] [Green Version]
- Angelini, P.; Nobili, A.; Picillo, C. The Interbank Market after August 2007: What has Changed, and Why? J. Money Credit. Bank. 2011, 43, 923–958. [Google Scholar] [CrossRef]
- Kirik, A.; Ulusoy, V. Winds of Tapering, Financial Gravity and COVID-19. N. Am. J. Econ. Financ. 2022, 62, 101719. [Google Scholar] [CrossRef]
Variables | Proxy | Source |
---|---|---|
where, denotes quoted 10-year zero-coupon inflation swap rates is the U.S. 10-year breakeven inflation rates | Bloomberg | |
Market-wide liquidity risk | Data are available at Jun Pan’s website: http://www.mit.edu/~junpan/; accessed on 10 December 2018 | |
Chicago Board Options Exchange (CBOE) SPX Volatility Index | Bloomberg | |
The U.S. 10-year sovereign zero coupon bond yields | Bloomberg |
Variable | Proxy | Source |
---|---|---|
Yield spreads between 10-year sovereign zero coupon bond yields and 1-year sovereign zero coupon bond yields for each commodity-exporting countries | Bloomberg | |
where, denotes quoted 10-year zero-coupon inflation swap rates is the U.S. 10-year breakeven inflation rates | Bloomberg | |
The U.S. 10-year sovereign zero coupon bond yields | Bloomberg | |
CBOE SPX Volatility Index | Bloomberg | |
Term premium on a 10-year zero coupon bond | Datastream | |
Central bank policy rate of each commodity-exporting country | Bloomberg |
Dependent Variables | Coefficients | t-Values |
---|---|---|
Constant | 0.1395 *** | 11.401 |
HPW | 0.0516 *** | 42.287 |
VIX | 0.0031 *** | 7.134 |
YIELD | 0.0201 *** | 5.783 |
R-Squared | 0.8332 |
Dependent Variables | Coefficient (Mean) | Coefficient (Standard Deviation) |
---|---|---|
HPW | 0.060135272 | 0.011778584 |
VIX | 0.003612778 | 0.000707628 |
YIELD | 0.023424786 | 0.004588169 |
Country | Variables | Diagnostic Tests | |||||||
---|---|---|---|---|---|---|---|---|---|
Constant | LP | PR | VIX | YIELD | TP | Weak Instrument | Wu-Hausman | Correlation between HPW and the Error Term of the Second Stage Regression | |
Australia | 1.9859 *** | −0.2751 *** | −0.5944 *** | 0.0260 *** | 0.0355 | 0.5025 *** | 252.593 *** | 8.884 *** | 0.00 |
Brazil | −0.1413 | 0.2590 *** | −0.0002 | 0.0131 *** | 1.3251 *** | −0.2956 *** | 510.94 *** | 50.54 *** | 0.00 |
Canada | 0.9428 *** | 0.6464 *** | −0.8262 *** | 0.0067 *** | 0.1775 *** | 0.4897 *** | 654.36 *** | 11.04 *** | 0.00 |
Chile | 2.9071 *** | 1.2886 *** | −0.8337 *** | 0.0079 *** | 0.4752 *** | −0.1685 *** | 697.40 *** | 146.40 *** | 0.00 |
India | 7.2295 *** | −1.6664 *** | −0.9165 *** | 0.0206 *** | 0.3649 *** | −0.5091 *** | 469.04 *** | 72.49 *** | 0.00 |
Indonesia | 0.5495 *** | −0.4994 | −0.2797 *** | 0.0480 *** | 0.6323 *** | 0.4760 *** | 357.00 *** | 66.56 *** | 0.00 |
Malaysia | 2.7681 *** | −0.4349 *** | −1.0886 *** | 0.0114 *** | 0.6802 *** | −0.3909 *** | 590.20 *** | 91.43 *** | 0.00 |
Mexico | 1.3677 *** | 0.8944 *** | −0.7514 *** | 0.0302 *** | 1.3146 *** | −0.3181 *** | 365.681 *** | 0.002 | 0.00 |
New Zealand | 1.9087 *** | −0.6521 *** | −0.6432 *** | 0.0240 *** | 0.2450 *** | 0.5751 *** | 385.42 *** | 90.57 *** | 0.00 |
Norway | 0.6140 *** | 1.1602 *** | −0.6774 *** | 0.0071 *** | 0.3110 *** | 0.2078 *** | 750.25 *** | 34.95 *** | 0.00 |
South Africa | 2.4628 *** | −4.5581 *** | 0.2504 ** | 0.0208 *** | −0.2571 ** | 0.3014 *** | 45.67 *** | 66.88 *** | 0.00 |
Thailand | 2.4558 *** | 0.6051 *** | −0.8843 *** | −0.0029 * | 0.3413 *** | −0.1588 *** | 346.891 *** | 0.002 | 0.00 |
Turkey | −0.7907 *** | 1.1611 *** | −0.0495 *** | 0.0098 *** | 0.3657 *** | 0.3145 *** | 256.529 *** | 0.082 | 0.00 |
Country | Coefficient (Mean) | Coefficient (Standard Deviation) | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
LP | PR | VIX | YIELD | TP | LP | PR | VIX | YIELD | TP | |
Australia | −0.192 | −0.416 | 0.018 | 0.025 | 0.351 | −0.199 | −0.429 | 0.019 | 0.026 | 0.363 |
Brazil | 0.823 | −0.001 | 0.042 | 4.213 | −0.940 | 0.289 | 0.000 | 0.015 | 1.478 | −0.330 |
Canada | 0.812 | −1.038 | 0.008 | 0.223 | 0.615 | 0.561 | −0.717 | 0.006 | 0.154 | 0.425 |
Chile | 1.488 | −0.963 | 0.009 | 0.549 | −0.195 | 1.834 | −1.187 | 0.011 | 0.676 | −0.240 |
India | −1.256 | −0.691 | 0.016 | 0.275 | −0.384 | −1.428 | −0.785 | 0.018 | 0.313 | −0.436 |
Indonesia | −0.914 | −0.512 | 0.088 | 1.157 | 0.871 | −0.474 | −0.265 | 0.046 | 0.600 | 0.451 |
Malaysia | −0.459 | −1.150 | 0.012 | 0.719 | −0.413 | −0.233 | −0.584 | 0.006 | 0.365 | −0.210 |
Mexico | 1.576 | −1.324 | 0.053 | 2.317 | −0.561 | 0.995 | −0.836 | 0.034 | 1.462 | −0.354 |
New Zealand | −0.607 | −0.599 | 0.022 | 0.228 | 0.535 | −0.816 | −0.805 | 0.030 | 0.307 | 0.720 |
Norway | 1.000 | −0.584 | 0.006 | 0.268 | 0.179 | 0.830 | −0.485 | 0.005 | 0.222 | 0.149 |
South Africa | −6.123 | 0.336 | 0.028 | −0.345 | 0.405 | −5.869 | 0.322 | 0.027 | −0.331 | 0.388 |
Thailand | 0.742 | −1.084 | −0.004 | 0.418 | −0.195 | 0.418 | −0.610 | −0.002 | 0.236 | −0.110 |
Turkey | 0.358 | −0.015 | 0.003 | 0.113 | 0.097 | 1.516 | −0.065 | 0.013 | 0.478 | 0.411 |
Disclaimer/Publisher’s Note: The statements, opinions and data contained in all publications are solely those of the individual author(s) and contributor(s) and not of MDPI and/or the editor(s). MDPI and/or the editor(s) disclaim responsibility for any injury to people or property resulting from any ideas, methods, instructions or products referred to in the content. |
© 2023 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https://creativecommons.org/licenses/by/4.0/).
Share and Cite
Yip, P.-S.; Lau, W.-Y.; Brooks, R. The Liquidity Effect of the U.S. QE on Sovereign Yield Spreads of Commodity-Exporting Countries. Commodities 2023, 2, 131-146. https://doi.org/10.3390/commodities2020008
Yip P-S, Lau W-Y, Brooks R. The Liquidity Effect of the U.S. QE on Sovereign Yield Spreads of Commodity-Exporting Countries. Commodities. 2023; 2(2):131-146. https://doi.org/10.3390/commodities2020008
Chicago/Turabian StyleYip, Pick-Schen, Wee-Yeap Lau, and Robert Brooks. 2023. "The Liquidity Effect of the U.S. QE on Sovereign Yield Spreads of Commodity-Exporting Countries" Commodities 2, no. 2: 131-146. https://doi.org/10.3390/commodities2020008