The spillover effects of quantitative easing on major emerging economies: the case of South Africa

Kaulinge, Ndilimeke Nelao Mbabyona

In this study, I analyse the potential spillover effects of large-scale asset purchases (LSAP) or quantitative easing (QE) implemented by the US Federal Reserve Bank (US Fed) and European Central Bank (ECB) on the South African economy. To start, I survey the literature and summarize the general themes that arise. The two main themes that I focused on for my research were that QE depreciated global currency rates and raised sovereign bond rates and that strong country fundamentals mitigated against the spillover effects of QE. I highlight the importance of macroeconomic and financial variables in determining the effects of QE, therefore the chosen model incorporates interest rates, credit default swap spreads, debt to GDP ratio, GDP growth, inflation, market capitalization to GDP and credit ratings. I quantify the effects of QE on South African long-term government bond yields and foreign exchange rates using a vector autoregressive (VAR) model, while making use of monthly data from March 2009 to December 2021. I measure the shock of QE using impulse response functions with a 24-month horizon. I found that QE implemented by the US Fed and the ECB significantly affected long-term government bond yields and foreign exchange rates in South Africa, and that they responded more to US QE than to ECB QE. While acknowledging that the model does not account for certain structural and socio-economic issues prevalent in South Africa today, I recommend that policymakers take steps toward developing domestic policies and institutions, maintaining a robust current account balance, reducing energy shortages, and maintaining political stability.

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