The impact of quantitative easing on capital flows to the BRICS economies

Abstract

A possible effect of quantitative easing (QE) undertaken by the United States of America (USA) Federal Reserve Bank (Fed) may have been an increase in capital flowing into emerging market economies (EMEs). The 2008 global financial crisis created an environment in which traditional monetary policies – cutting policy rates – became ineffective in stimulating growth. Faced with this policy environment, several high-income countries including the USA resorted to unconventional monetary policies notably QE, to grow their economies. While QE was effective in lowering interest rates in high-income countries, some argued that investors switched to higher yielding assets, mostly EME assets. Therefore, QE is perceived to have increased capital flows into EMEs. Using a dynamic panel data model with fixed effects this mini-thesis investigates empirically whether QE worked through unobservable channels to increase gross private capital inflows to Brazil, Russia, India, China and South Africa (BRICS) in the period 2000-2015. The study finds evidence in support of the view that QE increased capital inflows to EMEs. The results reveal that gross private capital inflows to the BRICS increased during the QE intervention period and that the increase was higher in the first period of QE than in subsequent QE periods. The empirical results also reveal differences in the way types of capital flows responded to QE; portfolio flows, and in particular equity flows were the most responsive to QE.