International Impacts of the Federal Reserve’s Quantitative Easing Program

Peterson Institute for International Economics

Summary and Policy Conclusions
Impact of Quantitative Easing (QE): As the world’s largest economy, its financial epicenter,and the issuer of the primary reserve currency, actions by the US Federal Reserve (“Fed”) will inevitably affect other countries via trade and exchange rates, capital flows, and overall financial conditions. The Fed’s monetary easing policies, including QE, have contributed to greater capital flows and exchange market pressures in the emerging markets (EMs). But other pull factors, notably growth in the EMs themselves, have been at least as important. QE has generally, and on balance, had a positive impact on emerging markets (EMs) and the global economy.

But in some instances they have added to pressures and volatility for EMs, complicating macroeconomic management, and the impact has depended significantly on the global macroeconomic situation as well as the situation in particular countries. QE1, for example, was unambiguously positive for the world and the EMs because it minimized, even eliminated, the tail risk of the near-collapse of the world economy in the aftermath of the Lehman Brothers crisis. QE2, on the other hand, occurred when the global macrofinancial context was less dire and at a time of macroeconomic heating in many EMs, provoking complaints from Brazil in particular.

Moreover, monetary easing and economic weakness characterized other industrial economies too, contributing to capital flows to the EMs. The threatened withdrawal of QE3 in May 2013 created the opposite types of pressures in EMs, namely capital outflows and sharp currency adjustments. But pressures were not uniform and were felt acutely in macroeconomically vulnerable economies.

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