Prague Economic Papers 2019, 28(2):178-195 | DOI: 10.18267/j.pep.679

Heterogeneous Impact of Quantitative Easing on Government Bond Yields

Mesut Turkay1,*, Timur Han Gur2
1 Undersecretariat of Treasury, Republic of Turkey, Ankara, Turkey (mesut.turkay@hazine.gov.tr)
2 Department of Economics, Hacettepe University, Ankara, Turkey (timurgur@hacettepe.edu.tr)

Interest rates in many advanced countries have reached zero lower bound and this has led to the widespread use of unconventional monetary policies after the global crisis. Hence, it has been more and more important to better understand the effects of these policies on major economic variables and the transmission mechanism through which they influence the economy. This study analyses the impact of quantitative easing (QE) policies on local currency government bond yield in emerging market (EM) economies in a heterogeneous panel setting. An Augmented Mean Group (AMG) estimator is used that allows for cross-sectional dependence and heterogeneous slopes. Model results show that government bond interest rates in EM economies are determined by country-specific factors such as central bank policy rate, inflation and budget deficit as well as external global factors such as US ten-year government bond yield and QE policies of advanced countries' central banks.

Keywords: Unconventional monetary policy, Quantitative easing, Augmented Mean Group
JEL classification: C23, E43, E52

Accepted: April 23, 2018; Published: April 1, 2019  Show citation

ACS AIP APA ASA Harvard Chicago IEEE ISO690 MLA NLM Turabian Vancouver
Turkay, M., & Gur, T.H. (2019). Heterogeneous Impact of Quantitative Easing on Government Bond Yields. Prague Economic Papers, 28(2), 178-195. doi: 10.18267/j.pep.679
Download citation
  • BibTeX (.bib)
  • Bookends (.ris)
  • EasyBib (.ris)
  • EndNote (.enw)
  • EndNote 8 (.xml)
  • ISI WoS (.isi)
  • Medlars (.medlars)
  • Mendeley (.ris)
  • MODS (.xml)
  • Papers (.ris)
  • RefWorks (.txt)
  • RefManager (.ris)
  • RIS (.ris)
  • MS Word (.xml)
  • Zotero (.ris)
    • Open full article

    References

    1. Baldacci, E., Kumar, M. (2010). Fiscal Deficits, Public Debt, and Sovereign Bond Yields. International Monetary Fund. Working Papers, 1-28, https://doi.org/10.5089/9781455202188.001 Go to original source...
    2. Bauer, M. D., Neely, C. J. (2014). International Channels of the Fed's Unconventional Monetary Policy. Journal of International Money and Finance, 44, 24-46, https://doi.org/10.1016/j.jimonfin.2013.12.007 Go to original source...
    3. Bond, S., Eberhardt, M. (2013). Accounting for Unobserved Heterogeneity in Panel Time Series Models. Nuffield College, University of Oxford.
    4. Bowman, D., Londono, J. M., Sapriza, H. (2015). US Unconventional Monetary Policy and Transmission to Emerging Market Economies. Journal of International Money and Finance, 55, 27-59, https://doi.org/10.1016/j.jimonfin.2015.02.016 Go to original source...
    5. Carrion-i-Silvestre, J. L., Castro, T. D. B., López-Bazo, E. (2005). Breaking the Panels: An Application to the GDP per Capita. Econometrics Journal, 8(2), 159-175, https://doi.org/10.1111/j.1368-423X.2005.00158.x Go to original source...
    6. Chen, Q., Filardo, A., He, D., Zhu, F. (2016). Financial Crisis, US Unconventional Monetary Policy and International Spillovers. Journal of International Money and Finance, 67, 62-81, https://doi.org/10.1016/j.jimonfin.2015.06.011 Go to original source...
    7. Christensen, J. H., Rudebusch, G. D. (2012). The Response of Interest Rates to US and UK Quantitative Easing. The Economic Journal, 122(564), F385-F414, https://doi.org/10.1111/j.1468-0297.2012.02554.x Go to original source...
    8. Chudik, A., Pesaran, M. H. (2015). Common Correlated Effects Estimation of Heterogeneous Dynamic Panel Data Models with Weakly Exogenous Regressors. Journal of Econometrics, 188(2), 393-420, https://doi.org/10.1016/j.jeconom.2015.03.007 Go to original source...
    9. Comelli, F. (2012). Emerging Market Sovereign Bond Spreads: Estimation and Back-testing. Emerging Markets Review, 13(4), 598-625, https://doi.org/10.1016/j.ememar.2012.09.002 Go to original source...
    10. Csontó, B. (2014). Emerging Market Sovereign Bond Spreads and Shifts in Global Market Sentiment. Emerging Markets Review, 20, 58-74, https://doi.org/10.1016/j.ememar.2014.05.003 Go to original source...
    11. D'Amico, S., King, T. B. (2013). Flow and Stock Effects of Large-Scale Treasury Purchases: Evidence on the Importance of Local Supply. Journal of Financial Economics, 108(2), 425-448, https://doi.org/10.1016/j.jfineco.2012.11.007 Go to original source...
    12. Eberhardt, M., Bond, S. (2009). Cross-section Dependence in Nonstationary Panel Models: A Novel Estimator. MPRA. Paper No. 17692.
    13. Eberhardt, M., Teal, F. (2011). Econometrics for Grumblers: A New Look at the Literature on Cross-country Growth Empirics. Journal of Economic Surveys, 25(1), 109-155, https://doi.org/10.1111/j.1467-6419.2010.00624.x Go to original source...
    14. Ebner, A. (2009). An Empirical Analysis on the Determinants of CEE Government Bond Spreads. Emerging Markets Review, 10(2), 97-121, https://doi.org/10.1016/j.ememar.2009.02.001 Go to original source...
    15. Eser, F., Schwaab, B. (2016). Evaluating the Impact of Unconventional Monetary Policy Measures: Empirical Evidence from the ECB's Securities Markets Programme. Journal of Financial Economics, 119(1), 147-167, https://doi.org/10.1016/j.jfineco.2015.06.003 Go to original source...
    16. Fratzscher, M., Lo Duca, M., Straub, R. (2016). On the International Spillovers of US Quantitative Easing. The Economic Journal, 128(608), 330-377, https://doi.org/10.1111/ecoj.12435 Go to original source...
    17. Gagnon, J., Raskin, M., Remache, J., Sack, B. (2011). The Financial Market Effects of the Federal Reserve's Large-scale Asset Purchases. International Journal of Central Banking, 7(1), 3-43, https://doi.org/10.1016/ijcb11q1a1 Go to original source...
    18. Georgiadis, G., Gräb, J. (2016). Global Financial Market Impact of the Announcement of the ECB's Extended Asset Purchase Programme. Journal of Financial Stability, 26, 257-265, https://doi.org/10.1016/j.jfs.2016.07.009 Go to original source...
    19. Horvath, R., Voslarova, K. (2017). International Spillovers of ECB's Unconventional Monetary Policy: The Effect on Central Europe. Applied Economics, 49(24), 2352-2364, https://doi.org/10.1080/00036846.2016.1237764 Go to original source...
    20. Jaramillo, L., Weber, A. (2013). Bond Yields in Emerging Economies: It Matters What State You Are In. Emerging Markets Review, 17, 169-185, https://doi.org/10.1016/j.ememar.2013.09.003 Go to original source...
    21. Joyce, M., Lasaosa, A., Stevens, I., Tong, M. (2011). The Financial Market Impact of Quantitative Easing in the United Kingdom. International Journal of Central Banking, 7(3), 113-161, https://doi.org/10.1016/ ijcb11q3a5 Go to original source...
    22. Joyce, M. A., Tong, M. (2012). QE and the Gilt Market: A Disaggregated Analysis. The Economic Journal, 122(564), F348-F384, https://doi.org/10.1111/j.1468-0297.2012.02552.x Go to original source...
    23. Kimura, T., Small, D. H. (2006). Quantitative Monetary Easing and Risk in Financial Asset Markets. Topics in Macroeconomics, 6(1), 1-54, https://doi.org/10.2202/1534-5998.1274 Go to original source...
    24. Miyajima, K., Mohanty, M. S., Chan, T. (2015). Emerging Market Local Currency Bonds: Diversification and Stability. Emerging Markets Review, 22, 126-139, https://doi.org/10.1016/j.ememar.2014.09.006 Go to original source...
    25. Neely, C. J. (2015). Unconventional Monetary Policy Had Large International Effects. Journal of Banking & Finance, 52, 101-111, https://doi.org/10.1016/j.jbankfin.2014.11.019 Go to original source...
    26. Ng, S., Perron, P. (2001). Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power. Econometrica, 69(6), 1529-1554, https://doi.org/10.1111/1468-0262.00256 Go to original source...
    27. Peiris, S. J. (2010). Foreign Participation in Emerging Markets' Local Currency Bond Markets. International Monetary Fund. Working Papers No. 1-19, https://doi.org/10.5089/9781451982602.001 Go to original source...
    28. Pesaran, M. H. (2004). General Diagnostic Tests for Cross Section Dependence in Panels. Institute for the Study of Labor, No. 1240. Go to original source...
    29. Pesaran, M. H. (2006). Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure. Econometrica, 74(4), 967-1012, https://doi.org/10.1111/j.1468-0262.2006.00692.x Go to original source...
    30. Pesaran, M. H. (2007). A Simple Panel Unit Root Test in the Presence of Cross-section Dependence. Journal of Applied Econometrics, 22(2), 265-312, https://doi.org/10.1002/jae.951 Go to original source...
    31. Pesaran, M. H., Shin, Y., Smith, R. P. (1999). Pooled Mean Group Estimation of Dynamic Heterogeneous Panels. Journal of the American Statistical Association, 94(446), 621-634, https://doi.org/10.2307/2670182 Go to original source...
    32. Pesaran, M., Smith, R. (1995). Estimating Long-run Relationships from Dynamic Heterogeneous Panels. Journal of Econometrics, 68(1), 79-113, https://doi.org/10.1016/0304-4076(94)01644-F Go to original source...
    33. Pesaran, M. H., Yamagata, T. (2008). Testing Slope Homogeneity in Large Panels. Journal of Econometrics, 142(1), 50-93, https://doi.org/10.1016/j.jeconom.2007.05.010 Go to original source...
    34. Pesaran, H., Ullah A., Yamagata T. (2008). A Bias-adjusted LM Test of Error Cross-section Independence. Econometrics Journal, 11(1), 105-127, https://doi.org/10.1111/j.1368-423X.2007.00227.x Go to original source...
    35. Potjagailo, G. (2017). Spillover Effects from Euro Area Monetary Policy Across Europe: A Factor-augmented VAR Approach. Journal of International Money and Finance, 72, 127-147, https://doi.org/10.1016/j.jimonfin.2017.01.003 Go to original source...
    36. Oda, N., Ueda, K. (2007). The Effects of the Bank of Japan's Zero Interest Rate Commitment and Quantitative Monetary Easing on the Yield Curve: A Macro-Finance Approach. The Japanese Economic Review, 58(3), 303-328, https://doi.org/10.1111/j.1468-5876.2007.00422.x Go to original source...
    37. Szczerbowicz, U. (2015). The ECB Unconventional Monetary Policies: Have They Lowered Market Borrowing Costs for Banks and Governments? International Journal of Central Banking, 11(4), 91-127, https://doi.org/10.1016/ ijcb15q5a3 Go to original source...
    38. Tillmann, P. (2016). Unconventional Monetary Policy and the Spillovers to Emerging Markets. Journal of International Money and Finance, 66, 136-156, https://doi.org/10.1016/j.jimonfin.2015.12.010 Go to original source...
    39. Uribe, M., Yue, V. Z. (2006). Country Spreads and Emerging Countries: Who Drives Whom? Journal of International Economics, 69(1), 6-36, https://doi.org/10.1016/j.jinteco.2005.04.003 Go to original source...
    40. Wright, J. H. (2012). What Does Monetary Policy Do to Long-term Interest Rates at the Zero Lower Bound? The Economic Journal, 122(564), F447-F466, https://doi.org/10.1111/j.1468-0297.2012.02556.x Go to original source...

    This is an open access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY NC ND 4.0), which permits non-comercial use, distribution, and reproduction in any medium, provided the original publication is properly cited. No use, distribution or reproduction is permitted which does not comply with these terms.


    Return to the content