On the Global Impact of Risk-off Shocks and Policy-put Frameworks

57 Pages Posted: 11 Mar 2019

See all articles by Ricardo J. Caballero

Ricardo J. Caballero

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Güneş Kamber

Bank for International Settlements (BIS) - Monetary and Economic Department

Multiple version iconThere are 2 versions of this paper

Date Written: March 8, 2019

Abstract

Global risk-off shocks can be highly destabilizing for financial markets and, absent an adequate policy response, may trigger severe recessions. Policy responses were more complex for developed economies with very low interest rates after the Global Financial Crisis (GFC). We document, however, that the unconventional policies adopted by the main central banks were effective in containing asset price declines. These policies impacted long rates and inspired confidence in a policy-put framework that reduced the persistence of risk-off shocks. We also show that domestic macroeconomic and financial conditions play a key role in benefiting from the spillovers of these policies during risk-off episodes. Countries like Japan, which already had very low long rates, benefited less. However, Japan still benefited from the reduced persistence of risk-off shocks. In contrast, since one of the main channels through which emerging markets are historically affected by global risk-off shocks is through a sharp rise in long rates, the unconventional monetary policy phase has been relatively benign to emerging markets during these episodes, especially for those economies with solid macroeconomic fundamentals and deep domestic financial markets. We also show that unconventional monetary policy in the US had strong effects on long interest rates in most economies in the Asia-Pacific region (which helps during risk-off events but may be destabilizing otherwise we do not take a stand on this tradeoff).

Keywords: Risk-off, conventional and unconventional monetary policy, policy-puts, spillovers, macroeconomic fundamentals, developed and emerging markets, Asia-Pacific region

JEL Classification: E40, E44, E52, E58, F30, F41, F44, G01

Suggested Citation

Caballero, Ricardo J. and Kamber, Gunes, On the Global Impact of Risk-off Shocks and Policy-put Frameworks (March 8, 2019). BIS Working Paper No. 772, Available at SSRN: https://ssrn.com/abstract=3349510

Ricardo J. Caballero (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Gunes Kamber

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

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