Quantitative Easing, Portfolio Choice and International Capital Flows Comment by Eduardo Fernández-Arias (personal views) Conference Debt and Credit, Growth and Crises Madrid, June 2012

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

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

Outline 1.Empirical exercise 2.Interpretation of empirical results 3.Revisit findings

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

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

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.

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)

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