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Quantitative easing in emerging market economies: Benefits, risks, and limitations

Quantitative easing in emerging market economies: Benefits, risks, and limitations

Central banks in emerging economies deployed asset purchases for the first time to respond to the Covid-19 shock. Initial studies have found quantitative easing reduced long-term bond yields in these economies without creating bouts of currency depreciation. This column argues that asset purchases ease financial conditions in emerging economies by curbing capital outflows enabled by stronger bank balance sheets upon the asset intermediation by the central bank. If asset purchases cause a de-anchoring in inflation expectations, their effectiveness diminishes. Counterfactual policy experiments reveal that bond yield reductions from asset purchases during the pandemic could have persisted only under large-sized programmes that are representative of advanced economies.