U.S. Quantitative easing policies: Their effect on the global bond markets : : A thesis submitted in partial fulfilment of the requirements for the degree of Doctor of Philosophy at Lincoln University

Abstract

Since the 2007 U.S. subprime crisis, major economies have suffered from severe recessions. Even cutting short-term interest rates to almost zero has not been enough to stimulate depressed economies. Under these circumstances, the Federal Reserve implemented an unconventional monetary easing policy in 2008; the Quantitative Easing (QE) policy. Within this U.S. QE framework, long-term U.S. assets, and in particular, long-term U.S. Treasuries, have been absorbed, with increasing reserves on the Fed’s balance sheet. This policy was initially designed to tackle domestic recession problems: it significantly reduced long-term U.S. interest rates and lowered unemployment levels. Due to the U.S.’s role in global markets, these U.S. QE policy effects are certain to spill over to other markets and economies. This study investigates the U.S. QE spillover effects on ten-year bond markets in both developed and emerging economies for the period 2007 to 2016. I apply both Structural VAR (SVAR) model and Dynamic Conditional Correlation-GARCH (DCC-GARCH) model to address the interactions among global bond markets when examining the U.S. QE spillover effects. The inclusion of both short- and long-term U.S. QE policy shocks better measures the policy shocks from each U.S. QE policy. Empirical evidence suggests a growing trend in integration levels between U.S. bond market and global bond markets during each U.S. QE period. This indicates a more substantial U.S. QE spillover effect to the global bond markets. Further, the results also reveal that long-term U.S. QE policy shocks will significantly reduce bond yields, particularly in developed markets, across all three U.S. QE periods. The results also show limited evidence which supports short-term U.S. QE spillover effects on bond yields. This means that long-term assets purchase activities will provide more long-lasting and substantial spillover effects on reducing long-term foreign bond yields. Furthermore, the results show pronounced volatility spillover effects, from both short-term and long-term U.S. QE policy shocks, although mainly on emerging bond markets. This significant U.S. QE volatility spillover effect indicates that although bond yields in emerging markets may not be subject to U.S. QE spillover effects, as a result of less developed financial market foundations, compared to the developed bond markets, they are more vulnerable and sensitive to the exogenous monetary shocks from leading economies.