Spillover Effect of US Unconventional Monetary Policy on Nigerian Economy

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1 Ob Kenneh e al., Inernaonal Journal of Research n Managemen, Economcs and Commerce, ISSN X, Impac Facor: 6.384, Volume 06 Issue 07, July 2016, Page 1-14 Spllover Effec of US Unconvenonal Moneary Polcy on Ngeran Economy Ob Kenneh 1 and Clemen Izuchukwu Igbanugo 2 1 (Assocae Professor of Economcs, Deparmen of Economcs, Nnamd Azkwe Unversy, Awka-Ngera) 2 (Deparmne of Economcs Awka-Ngera) Absrac: Snce he lae 2000 when he US launched s unconvenonal moneary polcy arsenals such as Quanave Easng (QE), Targeed Asses Purchase (TAP) and Forward Gudance n response o he grea recesson, argumens have subssed n he leraure on wheher such acons could have spllover effecs on small open economes. In hs paper, we nvesgaed he spllover effec of US uncovenonal Moneary Polcy (UMP) on Ngeran economy. We fed monhly US moneary polcy proxes assummed o be weakly exogenous and monhly Ngeran daa spannng from 2006:M1 o 2015:M12 no a Bayesan VARX model. The Impulse Response Funcon was also esmaed. The maor fndng of hs sudy s ha US UMP exers beggar-hy-neghbour effec on Ngeran economy. Tha s, he US UMP depresses growh, expor and exernal reserves n Ngera. The maor ransmsson channel s found o be rade channel. Also, he nflow of ho money has led he polcy makers o respond o excess lqudy by rasng he polcy rae. Ths procyclcaly has raher encouraged more nflow of ho money and has dscouraged nvesmne. We herefore recommend ha o effecvely nsulae Ngeran economy from beggar-hyneghbour effecs of US UMP, she mus follow sound macroeconomc and macroprudenal polces ha would allow hero mnmze sysemc rsk arsng from US UMPand as well buld buffers. Ngeran polcy makers need o make concered effor o make expor more compeve by focusng on expor promoon and mpor subs uon sraeges. Keywords: Unconvenonal Moneary Polcy (UMP), Spllover effec, beggar-hy neghbour, Bayesan VARX I.INTRODUCTION Over he pas fve decades, he global economy has experenced deepenng of fnancal lnkages as well as dramac rade and economc negraon. As shown n fgure 1.1, oal world rade has ncreased from US$ bllon n 1970 o US$ bllon n 2015, ndcang 1245 per cen ncrease. Also, he rao of U.S. expor o GDP has more han rppled havng ncreased by more han 200 per cenbeween 1970 and Andersen, Bollersl, Debold & Vega (2007) also noed ha he U.S. has mananed a leadng role n cross -boarder fnance. Thus, n a progressvely negrang world economy and fnancal sysem, cross -border spllover may be nevable. Fgure 1.1: world rade n volume ( measured n bllons os US dollars) Source: Graph Generaed by he Auhors from Daa obaned from Federal Reserves Bank of S. Lous Page 1

2 Ob Kenneh e al., Inernaonal Journal of Research n Managemen, Economcs and Commerce, ISSN X, Impac Facor: 6.384, Volume 06 Issue 07, July 2016, Page Fgure 1.2: U.S. expor o GDP rao ( n per cen) and year-on-year percenage change n he rao expor o GDP rao percenage change n expor o GDP rao Source: Graph Generaed by he Auhors from Daa obaned from Federal Reserves Bank of S. Lous An example of he consequences of hs ncreased nerconnecedness s he recen oucome of he Global Fnancal Crss, whch orgnaed n he US and rapdly spread o oher counres. I brough down wh he nvesmen banks, nsurance companes, commercal banks, morgage lenders, and a number of companes who reled on cred. Furhermore, he conagous downurn spread o maor economes across he globe ha had dabbled n he Amercan real esae secor, wpng ou over 30% of he value of a number of maor economes. The resul was a wdespread slowdown n growh, n he U.S., and n he world as shown n fgure 1.3 Fgure 1.3: Global and U.S. GDP growh rae beween 2004 and 2009 Source: Graph Generaed by he Auhors from Daa obaned from Federal Reserves Bank of S. Lous In response o he economc meldown, he U.S federal reserve, havng exhaused s conveonal moneary polcy arsenals ( such ha he nomnal neres raes were close o zero) resored ounconvenonal moneary polcy. Some of he unconvenonal moneary polces adoped by he U.S. federal reserves nclude Targeed Ass es Purchase( TAP), Quanave Easng (QE) and Forward Gudance (FG). For example, followng he collapse of Lehman Brohers n sepember, 2008, he Fed naed mmedae provson of cred o key markes and nermedares (an example of TAP). Ths was followed by a rapd expanson of Fed s balance shee (an example of QE) ha sared n November Beween November, 2008 and February, 2009, Fed had purchased $100 bllon and $500 bllon of agency deb and morgage-backed secures respecvely. In March, 2009 Fed bough anoher $850 bllon worh of morgage-backed secures and deb. Ths amoun reached a peak of $2.1 rllon n June Ths marked he end of he frs phase of QE usually called QE1. The second phase whch nvolved anohe r bond buyng program was announced by he Feds charman, Benarke n November, Ths nvolved buyng $600 bllon worh of longer-daed reasures by md 2011 (Conerly, 2012; Federal Reserve, 2008; Annalyn, 2010). Page 2

3 Ob Kenneh e al., Inernaonal Journal of Research n Managemen, Economcs and Commerce, ISSN X, Impac Facor: 6.384, Volume 06 Issue 07, July 2016, Page 1-14 By Sepember, 2012 he Federal Open Marke Commee (FOMC), he Federal Reserve decded o launch a new $40 bllon per monh, open-ended bond purchasng program of agency morgage-backed secures. Ths was called QE3. Sll mananng he federal funds rae a near zero, he FOMC, on 12 December 2012, announced an ncrease n he amoun of open-ended purchases from $40 bllon o $85 bllon per monh (Abdulmalk, 2015; Annalyn, 2010; Federal Reserve, 2008). The non-sandard moneary polcy measures are adudged crcumsanally approprae, a leas from he sand pon of he U.S. economy. The U.S. economy responded almos mmedaely o he Fed s acons. More obs were generaed n he prvae secor, busness confdence was relavely boosed and economc growh umped from s all me low of -3% n 2009 o over 2% from 2010 o curren perod as shown n fgure 1.5. Meanwhle neres rae remaned a zero bound hroughou he era of he unconvenonal moneary polcy measures. Source: Graph Generaed by he Auhors from Daa obaned from Federal Reserves Bank of S. Lous Bu he worry s: can he unconvenonal moneary polcy measures n he U.S. be of any sgnfcan effec n Ngera. Tha s, s he Ngeran economy drven by moneary condons n he U.S.? If yes, do h e Ngeran polcy makers facor such effecs no her polcy desgn. Of course, heorecal models show ha polcy decsons n large economes spllover no smaller open economes hrough varous channels such asporfolo balance channel, exchange rae channel, rade channel, sgnallng channel among ohers. For example, porfolo balance modeldescrbes he neracon beween foregn neres rae, he bond marke, rsk percepons exchange rae, oupu and moneary smulus. Furhermore, he basc Mundell Flemng-Dornbush (MFD) model predcs ha unconvenonal moneary polcy n a large economy can have boh negave and posve effecs on oher economes. Whle exchange rae deprecaon n he effec-ransmng economy ends o worsen he rade balance n he effec- Page 3

4 Ob Kenneh e al., Inernaonal Journal of Research n Managemen, Economcs and Commerce, ISSN X, Impac Facor: 6.384, Volume 06 Issue 07, July 2016, Page 1-14 recpen economy, ncreased demand n he effec-ransmng economy ends o lead o ncrease n he ne expor n he effec-recpen economy. The overall effec on he effec-recpen economy depends on he counry characerscs, shock absorpon mechans m and polcy responses. Thus, here s, unarguably, a need o undersand and ncorporae no our polcy decson-makng he ancpaed effecs of moneary polces from advanced economes such as he U.S. Ths need becomes more pressng gven he dearh of emprcal research on he spllover effec of U.S. moneary polcy on he Ngeran economy. As a he me of hs research, no such emprcal work exs o he bes of he knowledge of he researchers. Ths makes hs work mely and expeden. In order o assess he poenal challenge n adusng o changes n global fnancng condons hs sudy nends o quanfy he poenal mpac of U.S. unconvenonal moneary polcy on he Ngeran economy. The res of he paper s arranged as follows. Secon wo dscusses he heorecal frmework, secon 3 dscusses economerc procedures and oucomes whle secon 4 dscusses he polcy mplcaons of he fndngs. II. THEORETICAL FRAMEWORK The workhorse open-economy macroeconomc model for predcng cross-border polcy spllover has been he mundel-flemmng Model (MFM). The Mundell-Flemng Model (1969) descrbes he workngs of an economy open o nernaonal rade n boh goods and fnancal asses. Accordng o Hnk le and Monel (1999) and Kawa (2015), MFM provdes a framework for moneary and fscal polcy analyss usng he Keynesan IS-LM model. Accordng o he MFM framework, he domesc economc condons depends no only on domesc economc fundamenals (summarsed by he IS-LM ) bu also on foregn economes economc acves. Thus, gven ha here s unresrced rans-border rade and capal flow, he MFM sugges a prema face evdence of cross-counry spllover effecs. Now, le s consder a wo-counry (say, U.S. and Ngera) Mundell-Flemng model. Suppose he U. S. mplemens expansonary moneary polcy whch ncreases money supply and lowers he neres rae. The MFM predcs wo effecs on he U.S. economy. Frs, moneary expanson n he U.S. leads o oupu expanson and currency deprecaon n he U.S. Ths s expeced o have wo compensang or offseng effecs on he Ngeran oupu level. Currency deprecaon n he U.S. wll make he U.S. expor more compeve Ngera s. Ths wll lead o declne n Ngera s ne expor and worsenng of s curren accoun as well as declne n oupu. In summary, moneary easng should lower he home neres rae relave o foregn raes and deprecae he home currency. Ths, n urn, booss he home rade balance, and hus home GDP, whle lowerng he rade balances and GDP of he counry's radng parners. Ths s a pure expendure-shfng effec- ha s, shfs expendures from foregn counres o he home counry. Such an effec s a key feaure of he Mundell-Flemng model of nernaonal moneary polcy neracons, and creaed he nellecual raonale for he vew ha moneary polcy easng exered "beggar-hy-neghbour" effecs on foregn economes. Ths s popularly known as he exchange rae channel. ( see Sun, 2011; Beckmann, Belke & Dreger, 2015). However, oupu expanson n he U.S. wll lead o rse n U.S. mpors whch ranslaes o ncrease n Ngeran expors. Bu, here s no a pror predcon of whch mpac wll domnae. If he U.S. currency deprecaon mpac domnaes, he overall mpac of U.S. moneary easng n Ngera wll be negave -oupu declne and curren accouns crses. On he oher hand, f he U.S. oupu expanson effec domnaes, he ov erall mpac of U.S. moneary expanson n Ngera wll be posve-ncrease n GDP and mproved curren accouns. Ths suggess ha he magnude of he spllover effec wll depend on boh polcy -nang and effec-recpen counry characerscs. For example, f he U.S. adops fxed exchange rae regme, he predced currency deprecaon may no occur-overall effec n Ngera wll be posve, and vce versa. Agan, f Ngera do no have excess capacy or ha s expor supply s nelasc, he overall mpac wll be negave. Second, he MFM predcs ha moneary expanson n he U.S. could lead o cross -counry capal flow and swchng of porfolo balances beween he U.S. and Ngera (remember ha we are usng sandard wo counry model of he MFM). To undersand he porfolo balance effec of nernaonal moneary polcy spllover, le us assume ha here wo fnancal asses-money and bonds. Money s he medum of exchange and pays no neres whle bonds refers o all asses excep money such as equy and debs and pays nomnal neres rae. Hamlon & Wu (2012) noed ha porfolo channel s a cenral channel hrough whch moneary easng affecs cross -counry capal flow. Snce QE nvolves he subsuon of longer-duraon asses for safe long-erm governmen bonds, whch n urn reduces he avalable sock of prvaely-held rsky asses, unme rsk appee wll hus be me by ncreasng demand for oher rsky nvesmens (see Gagnon., Raskn, Remache & Sack, 2011; Lm, M ohapara & Socker, 2014). Page 4

5 Ob Kenneh e al., Inernaonal Journal of Research n Managemen, Economcs and Commerce, ISSN X, Impac Facor: 6.384, Volume 06 Issue 07, July 2016, Page 1-14 Porfolo balance model assumes ha asses denomnaed n dfferen currences are no perfecly subsuable. Ths mples ha alhough perfec capal mobly (CIP) holds, perfec capal subsuably does no. In oher words, reurns on bonds, when expressed n a common currency, mgh dffer due o a rsk premum ( Frankel, 1984). Thus, we would expec he porfolo balance channel o be expressed boh n erms of heghened demand for emporal (longer duraon) and spaal (developng counry) asses, whch comes abou as nvesors rebalance her porfolos. Followng from Frankel (1984) and Dooley and Isard (1982), le s assume ha here are n nvesors who nves n governmen debs domnaed only n her local currency such ha: D S D ( E s 1 ) 2.1 where D and D are ne supples of domesc and foregn deb-bonds and 1 s he exchange rsk premum on domesc currency or he devaon from uncovered neres pary. Also, he holdngs of domesc bonds, relave o foregn currency denomnaed bonds, are a posve funcon of he exchange rsk premum. The above model predcs ha f he cenral bank were o purchase domesc bonds, hs would reduce he sock of bonds held by he prvae secor. Assumng he funconal form for relave bond demand s lnear exponenal n, hen afer rearrangemen, equaon (2.1) becomes: s 0 E s 1 ) + d d 2.2 Bu snce he erm n he parenheses s unobservable, esmang equaon (2.2) s prey dffcul. Now, suppose he expeced nflaon s zero hen (2.2) becomes: s 0 ) ) + d d 2.3 1( 1( Noce ha he equaon ndcaes ha as d ncreases, s falls (apprecaes): as he sock of foregn asses held by home rses, he exchange rae apprecaes. The mpac of cenral bank purchases of bonds has ambguous effecs, as removes bonds from he prvae secor, reducng d. In equaon (2.2), ha mples an apprecaon of he exchange rae, couner o nuon regardng moneary easng hrough asses purchase hrough quanave easng (QE) or Large-scale asses purchases (LSAPs). The porfolo balance channel mples ha cenral bank bond purchases wll affec he erm premum n long-erm neres raes due o mperfec subsuably beween secures of dfferen maures or asse classes. Marke segmenaon mples ha he amoun and maury srucure of ousandng governmen secures, whch s affeced by QE or LSAPs, deermne rsk prema n longerm neres raes. Porfolo balance models sugges ha nvesors have downward slopng demand for specfc ypes of rsk (e.g., duraon rsk) and herefore a reducon n he supply of an asse should reduce he requ red expeced reurn on ha asse and asses whose reurns covary posvely wh. Inuvely, f he QE or LSAP rases U.S. bond prces, hen nvesors wll end o subsue oward he now relavely underprced deb of smlar qualy (domesc or nernaonal), drvng up he prce of ha deb. Ths subsuon wll affec all secures whose reurns covary posvely wh he purchased asse ( Bauer & Rudebusch, 2013; Woodford, 2012; D Amco, Englsh, Lopez-Saldo & Nelson November, 2012; Bauer and Nelly, 2013). In summary, when moneary polcy s eased, lowers longer-erm yelds and rases oher asse prces n he home counry (he U.S.); hs leads, hrough porfolo balance effecs among fnancally nerconneced economes ( such as Ngera), o capal flows o (and lower yelds and hgher asse prces n) foregn economes ( such as Ngera). Thus, conrary o speculaons ha nernaonal moneary polcy spllover s srcly negave, here s clear ndcaon ha can raher be posve. Agan, wheher he effec s posve or negave depends largely on counry characerscs and he behavour of economc agens. III. REVIEW OF EMPIRICAL LITERATURE Alhough he effecveness of unconvenonal moneary polcy measures on d omesc economy has been suded exensvely, he analyss of cross-border spllover effecs of such polces from one economy o anoher only sared o receve ncreasng aenon n he emprcal leraure n recen me. To be precse, emprcal nve sgaon of he spllover effec of non-sandard moneary polcy measures from advanced economes o emergng or even less developed economes sared ganng momenum followng he Fed s, ECB s and Japan s launch of seres of unconvenonal moneary polcy measures as a polcy response o he 2007/08 global downurn. Among he frs sudes addressng he spllover effecs s Hamao, Masuls, & Ng (1990). The ro suded correlaons n prce changes and volaly across sock markes n Tokyo, London an d New York. Ulsng a GARCH-M model hey esmaed nernaonal spllovers of Yen, pounds and dollar exchange raes across Tokyo, Page 5 E s

6 Ob Kenneh e al., Inernaonal Journal of Research n Managemen, Economcs and Commerce, ISSN X, Impac Facor: 6.384, Volume 06 Issue 07, July 2016, Page 1-14 London and New York. Ther sudy reveal ha afer one marke closes, volaly s ransmed o he markes openng several hours laer even hough hese markes are geographcally dsan. In a smlar sudy Ln, Engle & Io (1994) nvesgaed he nernaonal ransmsson of sock reurns and volaly beween he U.S. and Japan. They parcularly suded he movemen of bulls and bears across borders. The sudy ulsed daly yen and dollar exchange rae n a GARCH-M framework. The resuls show he exsence of b-dreconal spllovers, e., daly reurns of New York are correlaed wh Tokyo's overngh reurns and vse versa. In conras o Hamao e al. (1990), hey fnd mnor evdence of spllovers from daly reurns n one marke o daly reurns n he oher marke. Moessner (2014) n a panel VAR sudy nvesgaed he nernaonal spllover effec of U.S. forward gudance on Eurozone s equy prces, CPI nflaon and he GDP. He found ha explc FOMC polcy rae gudance announcemens a he zero lower bound led o hgher equy prces n he Eurozone. He also found ha equy ndces of economes wh lower soveregn rangs rose by more han ha of hose wh hgher soveregn rangs. Ths s conssen wh he rsk-akng channel of moneary polcy. Chen, Mancn-Grffol & Sahay (2014) nvesgaed he spllovers from Uned Saes moneary polcy on Emergng Markes. Usng even sudy mehodology hey found ha U.S. moneary polcy shocks do affec capal nflows and asse prce movemens n emergng marke economes. These resuls sem from an even analyss coverng U.S. moneary polcy announcemens from January 2000 o March They also found ha ha spllover effecs per un of U.S. moneary polcy surprse are dfferen and sronger durng he unconvenonal moneary polcy (UMP) phase (sarng n November 2008 wh large scale asse purchases), relave o he phase of convenonal moneary polcy (January 2000 o July 2007). For many asses, spllovers were especally large when he U.S. began dscussng he aperng of s asse purchases. Frazscher e al. (2013) suded he global spllovers of he Fed s unconvenonal moneary polcy measures on emergng markes. They conclude ha such polces affeced capal flows o emergng marke economes n a pro-cyclcal manner, have rased asse prces globally and weakened he US dollar. Lm, Mohapara & Socker (2014) suded he effecs of quanave easng (QE) polces n he US on gross fnancal nflows o developng counres. They found ha QE have been ransmed nernaonally hrough lqudy, porfolo rebalancng, and confdence channels. Neely (2013) argues ha he large mpac of he Fed s LSAP announcemens on nernaonal yelds are conssen wh a porfolo balance effec bu he does no drecly evaluae he relave mporance of sgnalng/porfolo balance effecs. Pablo, Hachula & Offermanns (2015) furher confrmed ha a U.S. UMP shock sgnfcanly ncreases porfolo flows from he U.S. o EMEs for almos wo quarers. The ncrease n nflows s accompaned by a perssen ncrease n several real and fnancal varables n EMEs. unlke Pablo, Hachula & Offermanns (2015) ha ulsed GVAR framework, Sayed & Reed (2015) raher employed hsorcal decomposon graphs o nvesgae he spllover effecs Of U.S. Federal Reserve s recen quanave easng On Canadan commody prces. They fnd sgnfcan spllover effecs on he Canadan commody prces under nvesgaon n he mmedae neghborhood (seven-monh horzon) of he large-scale asse purchases, especally he second round of quanave easng. Sohrab (2015) employed a sandard reduced-form VAR model o examne he effecs of U.S. polcy acons on a group of Asa Froner Developng Economes (FDEs). He fnds ha he mpac of unconvenonal moneary polcy on Asa FDE has been relavely mnor. He herefore concluded ha he drec mpac of any Fed aperng on FDEs n Asa s lkely o be, a bes, small. The fndngs of hs sudy may be affeced by he smplfyng assumpon ha here s symmery n he response of counres o unconvenonal moneary polcy and s ex. However, he mpac of unconvenonal moneary polcy could be dfferen from s ex dependng upon wheher he ex s orderly or no. From he foregong, one wll conclude ha a small-open economy wh unresrced rade and capal flow s vulnerable o spllover efefc of large economy s moneary condon. However, wheher he overall effec s posve or negave remans emprcally unseled. Agan, he magnude of such effec s also unceran. IV. ESTIMATING THE SPILLOVER EFFECT OF UNCONVENTIONAL MONETARY POLICY Economerc Mehod To esmae he spllover effec of U.S. unconvenonal moneary polcy on Ngeran economy,we esmaed a bayesan BVARX model as ulsed by Sms & Zha (1998) and Banbu ra, Gannone & Rechln (2010). Bayesan VAR model sdeseps he problem of overparameersaon assocaed wh assocaed wh macroeconomc sudy of hs naure by mposng resrcons on parameerso reduce he parameer se. Also, VARX mehod mposes weak exogeney of he foregn counry moneary polcy varabes. Tha s, VARX model s a VAR model augmened by exogenous varable(s). Shocks from he exogenous varable are he focus of our sudy. Page 6

7 Ob Kenneh e al., Inernaonal Journal of Research n Managemen, Economcs and Commerce, ISSN X, Impac Facor: 6.384, Volume 06 Issue 07, July 2016, Page 1-14 y In our model, he vecor of he frs dfferences of n endogenous varables,. p 1. y p 0. y For = 1,2,3,...N varables Where:. s me specfc effecs; y y, d, y, s deermned as follows: s a vecor of nnovaons ha may be conemporaneously correlaed bu areuncorrelaed wh her own lagged values and uncorrelaed wh all of he rghhand sde varables. (3.1) s assumed o be ndependenly and dencally dsrbued (..d) wh mean zero and an (n x n) symmerc varance-covarance marx for each specfc VAR equaon and me.e. ~..d (0, ). y s a k 1vecor of domesc macroeconomc varables, and macroeconomc varables such ha ' ( gdp, cp, fd, er,exp, m2, mpr, rsk, ex, realr ) ' ( spr, cspr, fbs, fs, mb, as) The vecor of domesc macroeconomc varables y s a k 1 vecor offoregn, y ncludes GDP growh rae ( gdp ),consumer prce ndex nflaon ( cp), foregn drec nvesmen (fd), exernal reserves(er),expor (expnd), moneary polcy rae (mpr), broad money (m2), mpor (mpnd), rsk premum (rsk), real neres rae (realr) and exchange rae (ex) y In he same ven, he vecor of foregn varables, ncludes US erm spread (spr), US corporae spread (cspr), federal reserve bank balance shee (fbs), US moneary base (mb), announcemen surprses (as). d s he observed global facor such as he CBOE Volaly Index (VIX) and global ol prce. Daa Source and Varables The movemen, covarances and summary sascs of he daa se s presened n appendx I. Foregn d aa proxng US moneary polcy nsrumens are obaned from Federal Reserves Bank of S. Lous daabase. All he foregn daa obaned are n level and spans from 2006:M1 o 2015:M12. The foregn varables are erm spread, corporae spread, Fed Balance Shee, Moneary base, fnancal sress. All domesc daa used o proxy Ngeran macroeconomy, excep nara-dollar exchange rae are obaned from World Bank Developmen Indcaors onlne daabase. The daa obaned spans from 2006 o However, we used Evew 8 o conver all he annual daa no monhly daa. The nara-dollar exchange rae used s monhly Bureau de Change (BDC) rae obaned from he Cenral Bank of Ngera. We used BDC rae snce represens he marke rae. Gven ha Ngera operaes fxed regme, offcal raes are usually regulaed such ha he exogenous effecs on he rae may be doused or rans-crcued. Oherdomesc varables are exernal reserves/gdp rao, GDP growh rae. CPI nflaon rae, foregn drec nvesmen, rs k premum, real neres rae, mpor and expor. To accoun for non-us conemporaneous effec on he domesc economy, global crude ol prce and global volaly ndex represened by CBOE are ncluded n he model specfcaon. The monhly daa for hese varables are obaned from Federal Feserves Bank of S. Lous. Analyss of Quanave Es maes US erm spread s found o have sgnfcan spllover effec on Ngeran Impor, Economc growh broad money supply and rsk premum. From he quanave esmaes n able..., f erm spread ncreases by one percen pon, he mpor and money supply ncreases by 0.38% and 0.008% respecvely. Also, f erm spread doubles economc growh and rsk premum delnes by 0.64% and 0.77%. US corporae spread s also found o exac sgnfcan spllover on Ngeran economy. Whle en per cen ncrease n corporae spread rases nflaon rae, foregn drec nvesmen and rsk premum by 0.5%, 0.016% and 1.32%, delnes expor, mpor, money supply and real neres rae by 0.89%, 35% and 0.08% 2.68%. Ths suggess ha porfolo rebalancng channel operaes n he global economy. Gven ha foregn long-erm soveregn deb s an mperfec subsue for domesc deb (see Chen, Flardo, He and Zhu, 2011), lowerng of US long erm bond hrough quanave easng may drve nvesors o swap her US bonds for Ngeran bonds n oher o ake advanage of hgher rsk-adused reurns. Ths ncreases Page 7

8 Ob Kenneh e al., Inernaonal Journal of Research n Managemen, Economcs and Commerce, ISSN X, Impac Facor: 6.384, Volume 06 Issue 07, July 2016, Page 1-14 ngeran FDI and may drve he MPR up as he Cenral Bank responds o excess lqudy n he fnancal marke. Ths corroboraes Ham,lon&Iwu (2012). US moneary s also found o comove wh Ngeran expor, foregn drec nvesmen, economc growh, money supply, reserves, rsk premum and real neres rae. Alhough moneary base s an admedly mperfec proxy measure for cenral bank polces (Chnn, 2013), has he vrue of beng closely relaed o wha he cenral bank self s dong (n conras o, for nsance, he money supply, whch s drven by bo h cenral bank and prvae secor decsons). Whle US moneary base has posve spllover effec on expor, foregn drec nvesmen, money supply, reserves, rsk premum and real neres rae, has negave effec on economc growh. Expor, foreg n drec nvesmen, economc growh, money supply, reserves, rsk premum and real neres rae enered he model wh he followng coeffcens: , 0.524, 0.159, 0.015, , and Ths may suggess he valdy of lqudy channel of UMP ranssson as suggesed by Lm, Mohapara&Socker (2014) and Krshnamurhy & Vssng-Jorgensen, 2011). Gven he explc and mplc polcy commmen nheren n he UMP, he polcy rae remaned whn he zero bound hrough he perod. Thus, he Large Scale Asse Purchases (LSAPs) hrough QE ncreases he reserves asses of US prvae banks. Ths leads o declne n lqudy premum and borrowng coss. Consequenly, prvae banks (ncludng prevously lqudy-consraned banks) exend more Table 3.1 Summary of Parameer Esmaes of Effecs of UMP on Ngeran Economy CPI Exchan Expor Impor Foregn Economc Broad Monear Foregn Rsk Real US Spread US Term Corporae Spread Federal Reserves Balance Shee US Broad Money Fnancal Sress Global Volaly Index Global Crude Ol Prce Announce men nflaon ge rae ndex ndex Drec Inves men as percen age GDP of Growh Money as percen age y Polcy Rae Reserve s as percen age GDP of Premu m Ineres Rae , Page 8

9 Ob Kenneh e al., Inernaonal Journal of Research n Managemen, Economcs and Commerce, ISSN X, Impac Facor: 6.384, Volume 06 Issue 07, July 2016, Page Source: Compled by he researchers from he regresson esmaes cred o nvesors ncludng developng counres such as Ngera. In urn, FDI n Ngera mproves and moneary aggregae may rse. US fnancal sress ndex also exers sgnfcan nfluence on Ngeran economy. One per cen pon ncrease n fnancal sress ndex deprecaes he exchange rae by 4.90 and ncreases he real neres rae and rsk premum by 0.2% and 0.14% respecvely; also, mpor and economc growh declnes by 1.29% and 1.5% respecvely. Also, doublng of fnancal sress ndex reduces expor, foregn drec nvesmen, reserves and rsk premum by 4.4%, 0.3%, 40.3% and 13.6% respecvely. Ths suggess ha Ngeran economy s very sensve o US fnancal sress. The model esmaes suggess ha unconvenonal moneary polcy announcemens surprsed markes wh nformaon on he fuure course of polcy. Announcemen of fuure pah of moneary polcy n he uned sae reduces Ngeran expor by 0.12%,; mpor by 3.6% and money supply by 0.011%. Moneary polcy surprses also ncreases rsk premum by 0.077%. Innovaon Accounng hrough he Impulse Response Funcon We compued he mpulse responses wh he assumpon ha he magnude of a shock on corresponds o he roo of he dagonal elemens or o one sandard devaon. A shock o he -h varable does no only drecly affec he -h varable bu s also ransmed o all of he oher endogenous varables hrough he dynamc (lag) srucure of he VAR. An mpulse response funcon (IRF) races he effec of a one-me shock o one of he nnovaons on curren and fuure values of he endogenous varables. Recall ha he model specfed n secon 3.1 s: y Where. y, p 1. y y and p 0. y, d, denoe vecors of endogenous varables, weakly exogenous foregn varables and conemporaneously uncorrelaed nnovaons or shocks. Hence, y = ( B ) 0 Ths wll yeld he srucural form based on he orhogonalzaon such ha I ( I B ) ( B) snce cov( ) =, hen s he MA coeffcens measurng he mpulse response. In oher words,, represens he response of varable y o un mpulse n varable y occurrng -h perod ago. Ths follows he recursve Cholesky orderng scheme whch s conssen wh exsng VAR leraure (Chen, 2015). We also follow Chen a al (2015) and Dees, d Mauro, Smh and Pesaran (2007) by assumng ha he U.S economy affecs bu does no respond o developmens n Ngeran economy. However, unlke Smh (2006) and Chudk and Frazscher (2012) ha ulsed 90 per cen boosrapped error bands and 25h/75h percenles error band, our confdence s 95 per cen. Gven ha we esmae our model usng bayesan procedure, he models no affeced by lmed degree of freedom. We used IRF o evaluae response of Ngeran economy o unconvenonal moneary polcy shocks from he US. Impulse Responses of Economc growh, Exernal Reserves and Expor o US UMP Fgure 3. 1 suggess ha economc growh responds perssenly o US moneary shocks. I reveals ha erm spread rases economc growh by 0.04% n he frs monh afer he shock. Ths s followed by a perssen negave response for he enre perod of shock, US corporae spread and moneary base depreses economc growh by 0.79 and 0.18 percenage pons respecvely. However, growh showed a perssen posve response o he sze of Federal Reserve balance shee afer one monh lag. Fnancal sress however, depresses growh by average of 0.39 percenage pon for a perod of en monhs afer a deepenng of fnancal dsress had occurred. However, only erm spread, corporae spread and fnancal sress have sascally sgnfcan mpac on growh.ths overall negave effec of UMP on growh corroboraes Georgads (2015). However, he furher noed ha he mpac of UMP on Page 9

10 Ob Kenneh e al., Inernaonal Journal of Research n Managemen, Economcs and Commerce, ISSN X, Impac Facor: 6.384, Volume 06 Issue 07, July 2016, Page 1-14 growh wll depend on such counry characerscs as exchange rae regme, level of rade openness and fnancal nergraon. Turnng o exernal reserves, erm spread agan follows smlar pah of negave mpac. Frs, one sandard devaon shock o US erm spread rase reserves by abou 7 percenage pon n he frs monh. By he second monh, he effec became progressvely and perssenly negave averagng 3.2 percen declne n exernal reserves. The effec of erm spread on reserves s found o be sascally sgnfcan.ho wever, corporae spread does no show a sgnfcan mpac on exernal reserves excep on he sevenh monh afer a conemporaneous shock. Expanson of US moneary base leads o asgnfcan ncrease n exernal reserves Response of GDPG o Cholesky One S.D. Innovaons.0002 Response of GDPG o Cholesky One S.D. Innovaons Response of RES o Cholesky One S.D. Innovaons Response of RES o Cholesky One S.D. Innovaons Response of EXPIND o Cholesky One S.D. Innovaons Response of EXPIND o Cholesky One S.D. Innovaons Fgure 3.1. response of economc growh (GDPG), exernal reserves (RES) and expor (EXPIND) o US erm spread (TSPR), Corporae spread (CSPR), Moneary base (MB), Fnancal Sress Index (FIST), Federal reserves balance shee (FBS) and Anouncemen surprses (AS). Conrarly, federal Reserves balance shee sze has sgnfcan negave mpac on exernal reserves. I declnes reserves by 3% n he second monh, 4% n he hrd monh and 4.5% n he enh monh. Announcemen surprses, however, appeared o have neglgble effec on reserves. 1%. Afer en monhs followng a shock, expor falls by 4.8%. One sandard devaon shock o erm spread also declnes expor by 0.7% n he frs monh and 1.2% n he hrd monh. However, he negave mpac apers gradually o 0.8% n he enh monh. However, a shock o US moneary base rases expor o a peak of 4% n he ffh monh afer he shock and apers gradually o 3% by he enh monh. The effecs of corporae spread, federal reserves balance shee sze an d announcemen surprses are neglgble are nsgnfcan n he frs en monhs. Fnancal sress ndex exers a sgnfcan negave effec on Ngeran expor. I worsens expor by hrough he perod excep he frs monh followng he shocks where rases expor by less han US dollar s he maor reserves currency n Ngera and gven he level of global fnancal negraon and moneary lnkages, fnancal dsress n he US s ransmed n a subsanal magnude o Ngera. Bu does appear ha eher he lquy and porfolo balance ransmsson channels are dsurbed or he US economy exhbs Page 10

11 Ob Kenneh e al., Inernaonal Journal of Research n Managemen, Economcs and Commerce, ISSN X, Impac Facor: 6.384, Volume 06 Issue 07, July 2016, Page 1-14 expendure swchng behavour. For example, as consumer and busness confdence mproves hrough QE US consumers ncrease her demand for domesc goods n sead of foregn goods. Ths furher depresses economc growh n Ngera..012 Response of CPIR o Cholesky One S.D. Innovaons.0010 Response of CPIR o Cholesky One S.D. Innovaons Response of IMPIND o Cholesky One S.D. Innovaons Response of IMPIND o Cholesky One S.D. Innovaons Response of FDI o Cholesky One S.D. Innovaons Response of FDI o Cholesky One S.D. Innovaons Fgure 3.2 response of consumer prce nflaon rae (CPIR), mpor (IMPIND) and Foregn Drec Invesmen (FDI) o US erm spread (TSPR), Corporae spread (CSPR), Moneary base (MB), Fnancal Sress Index (FIST), Federal reserves balance shee (FBS) and Anouncemen surprses (AS). Impulse Responses of nflaon rae, Impor and Foregn Drec Invesmen o US UMP A US easng rases Ngeran nflaon. Followng 12.2 bass pon cu n he U.S erm spread, he Ngeran consumer prce ndex nflaon rae rses n he frs monh by 30 bass pons n he frs monh and speedly apers o 16.7 bass pons n he sxh monh hrough o he enh monh. One sandard devaon shock o he moneary base nally rases nflaon by 0.3% n he frs monh and collapsed grandually no negave mpac from he ffh monh. The mpulse of unconvenonal moneary polcy shock hrough corporae spread s found o be nsgnfcan hroughou he perod. Ngeran nflaon rae responds negavely o fnancal sress ndex, fed balance shee and announcemen surprses. For example, one sandard devaon shock o fnancal sress lowers nflaon by 2%. However, hs effec des off gradually unl normalses afer he enh monh followng he shock. Bu he negave effec of fed balance shee sze s raher amplfed no he subsquen perods from 0.5% declne n he secnd monh o 1.5% declne n he nneh monh afer he shock. Announcemen does no have sgnfcan effec on nflaon rae. Impor responds posvely o US polcy response as ndcaed by moneary base, erm spread and corporae spread. However effec of erm spread s nsgnfcan. US moneary base depresses mpor n he frs monh by 5% and rase by 10% n he secnd monh and almos 20% by he enh monh. Impulse Responses of exchange rae, rsk premum and real neres rae o US UMP The response of FDI o one sandard devaon shock from US moneary base, corporae spread and erm spread s mxed. Whle FDI rses by 0.5% n he ffh monh n response o US erm spread, declnes by 0.2% n resonse o US moneary base n he same perod. Corporae s pread does no affec FDI sgnfcanly hroughou he perod. Page 11

12 Ob Kenneh e al., Inernaonal Journal of Research n Managemen, Economcs and Commerce, ISSN X, Impac Facor: 6.384, Volume 06 Issue 07, July 2016, Page 1-14 Whle mpor responds negavely o fnancal dsress and announcemen, responds posvely o fed balance shee. However, s response o announce s no sgnfcan. Every one sandard devaon shock o fed balance shee rases mpor by a leas 5%. The mpac amplfes frm 6% n he secnd monh followng he shock o 10% afer en monhs. Impor responds o fnancal sress from he hrd monh afer a posve shock o. In response o one percenage pon ncrease n fnancal sress, mpor declnes by 2.5% n he hrd monh and amplfes o 5% n he enh monh followng he shock. Response of EXCHR o Cholesky One S.D. Innovaons Response of EXCHR o Cholesky One S.D. Innovaons Response of RISK o Cholesky One S.D. Innovaons Response of RISK o Cholesky One S.D. Innovaons Response of REALR o Cholesky One S.D. Innovaons Response of REALR o Cholesky One S.D. Innovaons Fgure 3.3. response of exchange rae (EXCHR), real neres rae (REALR) and rsk premum (RISK) o US erm spread (TSPR), Corporae spread (CSPR), Moneary base (MB), Fnancal Sress Index (FIST), Federal reserves balance shee (FBS) and Anouncemen surprses (AS). Exchange rae deprecaes n response o fnancal sress, erm spread bu apprecaes n response o ncrease n moneary base. Alhough ncrease n fed balance shee deprecaes he exchange rae n he frs monh by 40%, he effec des off a he end of he second monh followng he shock. Announcemen does no seem o surprse he exchange rae hroughou he perod. Moneary base, however, apprecaes he exchange rae. The average response of exchange rae o moneary base hroughou he perod s 8.6 percenage pon apprecaon. The response of exchange rae o US UMP gves nsgh o he vulnerably of he Ngeran economy. UMP nally apprecaes he exchange rae as predced by heory. Bu n less han a quarer he overall effec becomes deprecaon of he nara. The deprecaon effec s expeced o have been ransmed hrough ncreased commody mporaon. The esmaed response of rsk premum o US unconvenonal moneary polcy ndcaes ha whle rsk premum s wdened by fnancal sress and erm spread, s conraced by expanson of boh fed balance shee and moneary base. When he Ngeran rsk premum ncreases relave o US, Ngera becomes a persuasve porfolo desnaon: he premum on rsky asses s now hgher. The IRF suggess ha he response of real neres rae s mxed. For example, afer he frs monh followng shock o fnancal sress real neres rae rose by 2.5%. Ths s Page 12

13 Ob Kenneh e al., Inernaonal Journal of Research n Managemen, Economcs and Commerce, ISSN X, Impac Facor: 6.384, Volume 06 Issue 07, July 2016, Page 1-14 susaned n he second monh bu sars declnng before he hrd monh unl apers o 1.5% by he enh monh. Ths s no unconneced wh he behavour of cross-border asses flow. As US polcy raes fall relave o Ngeran polcy rae, he real rae rses gven nflaon. Ths pulls asses from he US no Ngera. As he supply of asses exceeds marke demand, he real rae falls hereby nang asse ex. Asses flow dynamcs s however ousde he scope of hs sudy. V. POLICY IMPLICATION AND CONCLUSION In hs sudy, we nvesgaed he spllover effec of US unconvenonal moneary polcy (UMP) on Ngeran economy. The fndngs from he quanave esmaes from BVAR and IRF ndcaes ha US unconvenonal moneary polces snce he lae 2000 exers beggar-hy-neghbour effec on Ngeran economy. In oher words, Ngeran economy s vulnerable o boh fnancal d sress and UMP emanang from he US. UMP depresses expor and economc growh n Ngera. Ths suggess ha US UMP raher has expendure swchng effec on US domesc economy hrough exchange rae deprecaon. As US demand swches from foregn o domesc commodes, Ngeran expor declnes, rade balance worsens and economc growh declnes. I does appear also ha he response of Cenral Bank of Ngera o excess lqudy orchesraed by he UMP weed he pass-hrough. Snce 2011 he CBN has conssenly rased he polcy rae. Ths procyclcaly may worsen domesc nvesmen, hereby depressng growh. However, wll also movae more nflow of ho money whch makes he economy more vulnerable.thus Ngera appeared o have opened up s elf o srongconagon effecs n he way wen abou aracng porfoloflows o buld reserves, smulae asse prce recovery n he sockmarkes and sablze or engneer apprecaon n her domesc currences. Bu he goal of reserves accumulaon has no been acheved. Ths may be due o several facors. Frs, he US expendure swchng behavour worsened expor and hus reduced foregn exchange earnngs. Second, deprecaon of US dollar n response o UMP encourages mporaon n Ngera whch ncreases he demand pressure on he avalable exernal reserves. Thrd, gven he Ngera s fxed regme sance and he ncpen deprecaon of he nomnal exchange rae, he CBN ends o ncrease s nervenon acves n he forex hereby depressng he exernal reserves. Also, he effec of plumeng global ol prce on reserves s noneheless subsanal hereby shorcrcung he full effec of capal nflow movaed by he UMP. Fro m he foregong, we herefore reco mmend ha o effecvely nsulae Ngeran economy fro m beggarhy-neghbour effecs of UMP, she mus follow sound macroeconomc polces ha would allow her o reap he benefs of and appropraely respond o capal nflow when he Federal Reserves Bank eases moneary polcy. In parcular, o mnmze sysemc rsk arsng from US UMP Ngera needs o fully use macroprudenal levers ha wll no only enhance auomac reducon of vulnerables bu also rase real oupu. Macroprudenal regulaons wll be desgned o nclude capal flow measures (CFMs), boh on nflows and ouflows, as necessary, hough no as a subsue for oher needed polcy adusmens) o reduce any vulnerables ha may have emerged, buld buffers, and connue o underake reforms ha wll rase poenal oupu and hereby maxmze he srengh of he pull facors. Ngeran polcy makers need o make concered effor o make expor more compeve by focusng on expor promoon and mpor subsuon sraeges. I mus however be no ed ha mpor subsuon s neher synonymous nor subsuable wh mpor resrcon. Ngera has dsaefully embarked on mpor resrcon n recen me whch has only succeded n rasng domesc prces ncludng expor prces. Ths s raher couner producve and procyclcal. VI. REFERENCE Al, A. (2015). Quanave Moneary Easng: The hsory and mpacs on fnancal markes. academa.edu. Rereved 14 June Bauer M.D., and C. J. Neely (2012). Inernaonal Channels of he Fed s Unconvenonal Moneary Polcy. Federal Reserve Bank of S. Lous Workng Paper No. 28. Bauer, M.D., and G. D. Rudebusch (2014). The Sgnalng Channel for Federal Reserve Bond Purchases. Inernaonal Journal of Cenral Bankng. 10 (3), , Sepember. Bauer M.D and C. J.,Nelly (2013). Inernaonal Channels of he Fed s Unconvenonal Moneary Polcy. Federal Reserve Bank Of San Francsco,Workng Paper Seres Basse,W.F., M. B., Chosak, J. C., Drscoll & E. Zakrasek (2010). Idenfyng he Macroeconomc Effecs of Bank Lendng. ECB Semnar Paper Censky, Annalyn (3 November 2010). QE2: Fed pulls he rgger. CNNmoney.com. Rereved 10 June Beckmann, J., A. Belke, and C. Dreger (2015). The Relevance of Inernaonal Spllovers and Asymmerc Effecs n he Taylor Rule. DIW Berln Dscusson Papers 1416 Conerly, Bll (13 Sepember 2012). QE3 and he Economy: I Wll Help, Bu No Solve All Problems. Forbes. Rereved 13 June Dees, S., F.d. Mauro, M.H. Pesaran and L.V. Smh (2007). Explorng he nernaonal lnkages of he euro area: a global VAR analyss. Journal of Appled Economercs, 22(1), Page 13

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