Effects of Quantitative Easing on Asia: Capital Flows and Financial Markets

Abstract

This paper studies the effects of US quantitative easing (QE) on Asia by examining capital flows and financial markets. After the global financial crisis (GFC), Asian economies with more open and developed capital markets experienced greater swings in capital inflows. In particular, large capital flows manifest more in portfolio investment and other investment such as bank loans than in foreign direct investment. Empirical analysis shows QE, QE1 in particular, significantly contributed to the rebounding of capital inflows to the region after the onset of the crisis by lowering domestic yield rates as well as CDS premiums. Although the currency value responses differed across countries, it appears that economies with stable exchange rates roughly coincide with those in which house prices have been rising, suggesting that monetary easing of advanced countries have affected Asian countries through either appreciation of currency values or increases in the prices of housing.