What the paper does: many firsts

1. Quantitative Easing, Portfolio Choice and International Capital FlowsComment by Eduardo Fernández-Arias(personal views)Conference Debt and Credit, Growth and CrisesMadrid, June 2012

2. What the paper does: many firsts • Estimates impacts of various US Fed QE actions on portfolio allocations (Q) and prices (P) across asset classes (equity and bonds), and XR. • Distinguishes between announcements and operations • Estimates spillovers to EME and AE of each impact. • Analyzes cyclicality of effects for EME, AE, US

3. Main empirical findings of the paper as to the international effects of Quantitative Easing • Actual operations are more important than announcements - will question • Portfolio effects across countries more important than those across (US) asset classes – will ask for clarification • Effects on prices more important than on financial flows – will ask for clarification • Procyclical effects on EM (and countercyclical on US) – will highlight

4. Outline • Empirical exercise • Interpretation of empirical results • Revisit findings

5. 1. Empirical Exercise. Some suggestions • Main comment: Announcements as dummies (no size) biases effect towards zero. Suggestions: • Interact dummy with operation size • Add up announcement and operation effects • Flow (Q) effects may require lags (new issuance) • Test sign of gamma (EME). Low and negative results for bond inflows; organize and test separate effects • Show that country effects do cluster in EME to validate panel groupings

6. 2. Interpretation of Empirical Results: not able to tease out policy channels • Channels underlying empirical results • Portfolio rebalancing to compensate shock to financial supply (needs a model; next) • Signaling of future policy (unclear how to map QE action to future stance) • Liquidity (is it recovered in operation effect?) • Confidence (belief that policy will improve economy) • Add to “confidence” lower credit risk due to higher collateral values (P) for stocks and junk bonds

7. 2. Interpretation of Results: Needs a general equilibrium portfolio model • Signs of effects through various channels in table 4 not obvious to me • Some elements in a model to study QE shock: • Effect on Q (credit easing) is higher the closer the substitute and possibly ambiguous for others • Effect on P (collateral values) is the opposite • Need to consider demand and supply elasticities; reallocations require modeling new issuances • Perhaps this may help teasing out channels.

8. 3. Revisiting Findings • Actual operations are more important than announcements – dummy not enough • Portfolio effects across countries more important than those across (US) asset classes – true for EMs? makes sense? formalize metrics and test • Effects on prices more important than on financial flows – discuss supply elasticity • Procyclical effects on EM (and countercyclical on US) – move to abstract, it is key (next)

9. Key finding of the paper: there are important international spillovers of QE of interest of G20 • Especially true for the asymmetric cyclical effects • Issues to extend the discussion • How would capital controls interact with QE? May them be countercyclical for all for capital account? • If capital controls are a form of protectionism due to effect on XR, so is credit easing • There may be room for a grand bargain to allow credit easing and regulate capital controls in exchange for international financial safety net