Essays on Unconventional Monetary Policy and the Global Financial Cycle

摘要

This dissertation considers two topics that are at the forefront of recent discussions in international finance: unconventional monetary policy and the global financial cycle.;Chapter 1 of the dissertation develops a framework to study the collateral channel of Quantitative Easing (QE)'s international transmission. The steady application of QE has been followed by big and non-monotonic effects on international asset prices and international capital flows. These are difficult to explain in conventional models, but arise naturally in a model with collateral. This chapter develops a general-equilibrium framework to explore QE's international transmission involving an advanced economy (AE) and an emerging market economy (EM) whose assets have less collateral value. Capital flows arise as a result of international sharing of scarce collateral. The crucial insight is that private AE agents adjust their portfolios in different ways (in response to QE), conditional on whether they are (i) fully leveraged, (ii) partially leveraged or (iii) unleveraged. Such portfolio shifts of international assets can diminish or even reverse the effectiveness of ever-larger QE interventions on asset prices. The model provides a simultaneous interpretation of several important stylized facts associated with QE.;Chapter 2 applies the previous model to analyze viable policy options for emerging market economies to mitigate the financial spillovers associated with QE. We develop a theoretical model that shows that in the near future, the monetary policies of some key central banks in advanced economies (AEs) will have two dimensions--changes in short-term policy rates and balance sheet adjustments. This will affect emerging market economies (EMs), especially those that are pegged, as these EMs primarily use a single monetary policy tool, i.e., the short-term policy rate. We show that changes in policy rates and balance sheet adjustments in AEs may differ in their respective financial spillovers to pegged EMs. Thus, it will be difficult for EMs to mitigate different types of spillovers with a single monetary policy tool. We provide suggestions for additional tools (e.g., capital control and/or macro-prudential policy) for EMs to complement their monetary policy and financial stability toolkit. We also discuss how balance sheet adjustments that affect long-term interest rates may percolate to influence short-term interest rates via financial plumbing.;Chapter 3 instead conducts an empirical study on the determinants of market sensitivity to the "global financial cycle'', and analyzes the associated implications for China's ongoing capital account liberalization. Global financial integration led to increasing comovements across different cross-border capital flows and asset prices, the so-called "global financial cycle". China however, has been relatively insulated, partly due to restrictions on its capital account. I investigate potential determinants of market sensitivity (for both the stock and currency markets) to the global financial cycle, and study its implications for China's move toward capital account liberalization. I show that there is an important distinction between cross-sectional and inter-temporal determinants of market sensitivity. Empirical findings also point to the presence of non-linearity in global risk aversion, as represented by the "VIX", in explaining global asset prices. I demonstrate through an empirical exercise that greater sensitivity to the global financial cycle would actually imply lower market volatility in China. This suggests that greater exposure to the global market may not necessarily contribute to higher market volatility in China.