But the quantitative easing from US Federal also has some global implications. The Bank of England and Bank of Japan are very likely to follow suit, but the European Central Bank is presently not in any mood to do so. Whether the ECB is able to maintain that position for a long time in the face of rising euro is a question to be answered, but Eurozone monetary easing would certainly lag that seen in other countries.
Despite this, monetary policy in developed countries will be eased substantially in the upcoming days, and it may pose major issues for prime emerging economies, which are in no need of monetary easing at this point of time. An International Monetary Fund research has conclusively shown that G4 monetary easing has completely transferred itself to the emerging economies in the past, immaterial of the fact that whether the move was warranted by their own economic circumstances.
There are some interesting queries about whether these linkages would be staying in place now when the form of liquidity injections is being taken by the G4 monetary policy, rather than decrease in short-term interest rates. One possibility that can be seen is US central bank purchasing bonds which will result in greater holdings of liquid reserve assets by the US banking sector, with a tendency to transfer a minute percentage of this dollar liquidity into foreign currencies. But it seems very likely in the present scenario that the increase in dollar liquidity supply will result a fall in the dollar, which is usually the way from where monetary easing is transferred to emerging economies. Its long-term economic impacts might be undesirable, but its short-term market impact cannot be ignored.
The research from IMF also suggests that generally, equities in Asia and Latin America soar high when there is a transfer of excessive equity from the G4 economies to emerging markets. Its extent depends on foreign exchange policies of various emerging countries. Still, the consequences of US Federal’s shift towards more quantitative easing on emerging equities and currencies are limited. A few investors are concerned that a surge in emerging economies might be hampered by sharp slowdown in the US markets. But there are signs of capital inflows to emerging markets reaching extraordinary proportions in the near future. US markets growing slowly in a positive way along with more quantitative easing, can prove to be an extremely positive cue for many emerging markets.
