Asset purchase programmes and the exchange rate
Title: Asset purchase programmes and the exchange rate
Summary: This paper examines how COVID-era asset purchase programmes affected bilateral exchange rates against the US dollar
Author: Sinem Yağmur Toraman (ESM)
Abstract: In this paper, I evaluate the impact of COVID-era asset purchase programmes (APPs) on the dollar exchange rate in both emerging markets (EMs) and ex-US advanced economies (AEs). In an event study analysis that includes APP announcements for 23 EMs and seven AEs, I find that APPs appreciated the exchange rate in EMs after controlling for the policy actions of the Federal Reserve (Fed), including Fed swap lines, the policy actions of other AEs, and the simultaneous policy actions of the implementing country itself. I interpret the results through the lens of long-run uncovered interest rate parity deviations driven by sovereign credit risk, showing that asset purchase surprises lower the promised yield but do not necessarily decrease the underlying risk-free rate in EMs. These results suggest that APPs might help Ems stabilise exchange rates during episodes of distress without necessarily intervening in the foreign exchange market.
Disclaimer: This Working Paper should not be reported as representing the views of the ESM. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the ESM or ESM policy. No responsibility or liability is accepted by the ESM in relation to the accuracy or completeness of the information, including any data sets, presented in this Working Paper.
Keywords: Asset purchase programmes; Central banks; Covered interest rate parity; Emerging markets; Event study; Exchange rates; Quantitative easing; Sovereign
credit risk; Uncovered interest rate parity
JEL codes: E58, F31, G14