Unconventional monetary policy spillovers: Evidence from India

• Date: 01 November 2019
• Author: Aiswarya Thomas,Lakshmi Kumar
• Published date: 01 November 2019
• DOI: http://doi.org/10.1002/pa.1940

ACADEMIC PAPER

Unconventional monetary policy spillovers: Evidence

from India

Aiswarya Thomas |Lakshmi Kumar

Economics, Institute for Financial Management

and Research, Chennai, India

Correspondence

Aiswarya Thomas, Research Scholar, Institute

for Financial Management and Research, 196

Pathasarathy Gardens, TT Krishnamachari

Road, Alwarpet, Chennai 600018, India.

Email: aishwarya.thomas@ifmr.ac.in

Many of the studies on the unconventional monetary policy spillover effects

concentrated primarily on the policy announcements of the U.S. Federal Reserve.

Using a time series approach, with dummies in the event study framework, this study

estimates the monetary policy spillover effects of the unconventional monetary

policy announcements of the central banks of four major economic regions: the

United States, the United Kingdom, European Central bank, and Japan on the asset

prices in India. In addition to that, this study estimates the asymmetry in the

responses to positive and negative surprise announcements. The study reveals that

unconventional monetary surprises do not have any significant impact on the asset

prices in India in a narrow time window.

1|INTRODUCTION

The effects of unconventional monetary policy (UMP) measures have

drawn attention from both academia and policymakers. The UMP

measures were adopted by large economies like the United States, the

United Kingdom, Eurozone, and Japan to address the financial

vulnerabilities in these economies after the global financial crisis, 2008.

These measures were almost inevitable for these large economies to

combat thefinancial debacle. However,critics opine that theUMPS also

entail portfoliocapital flows to emerging marketeconomies (EMES) and

other non‐UMP advanced economies, thus raising concerns in the

non‐UMP economies. Historically, these concernsare motivated by the

Asian financialcrisis of 1997–1998partly caused by the monetary policy

fluctuations in advanced economies. Exchange rate regimes were

identified as thechief contributing factor of theinternational monetary

policy spillovers, then Mundell (1963). However, recent studies argue

that the major contributing factors of international monetary policy

spillovers are capital flows, credit growth, and bank leverages

(Rey, 2015; Chen, Filardo, He, & Zhu, 2016; Prabu, Bhattacharyya, &

Ray, 2016). These factors have become quite prominent as a result

of the unconventional monetary measures implemented by the large

advanced economies. Hence, the UMP spillovers call forth adequate

attention fromall the major non‐UMP economiesincluding India.

The burgeoning literature on the UMP suggests that these

measures have exerted significant spillover effects globally (Ahmad

and Zlate, 2014; Diez & Presno, 2013; Berge & Cao, 2014). Majority

of the studies on the UMP spillovers focus on the UMP spillovers on

the asset prices of EMES in a panel framework (see, for example,

Tillman, 2016; Bowman, Londono, & Sapriza, 2015; and Chen

et al.,2015). There are also studies on the spillover effects of UMP on

large advanced economies (see, inter alia, Bauer & Neely, 2014; Rogers,

Scotti, & Wright, 2014; Glick & Leduc, 2012). However, studies on the

UMP spillovers on a single emerging market economy is very scant.

Though there are limited numbers of studies on the UMP spillovers

on the Indian asset markets, they either study a single asset price (see,

for example, Prabu et al., 2016) or they consider only the monetary

policy announcements of the Federal Reserve (see, for example, Patra,

Khundrakpam, et al., 2016). In an effort to fill in this gap, this study

estimates the impact of UMP announcements by the central banks

of four major currency areas (the United States, Euro area, United

Kingdom, and Japan) on three major asset prices (government bond

yields, equities, and exchange rates). In addition to that, this study also

tries to capture the spillover asymmetries with respect to positive and

negative surprise induced by the UMP announcements. This study

uses high‐frequency data to implement an event study in appropriate

windows around the policy announcements.

Received: 11 February 2019 Accepted: 23 February 2019

DOI: 10.1002/pa.1940

J Public Affairs. 2019; :e1940.

https://doi.org/10.1002/pa.1940

© 2019 John Wiley & Sons, Ltd.

wileyonlinelibrary.com/journal/pa 1of819