Transmission Mechanisms of Quantitative Easing in Open Economy

<p style="margin-left: 1cm; text-align: justify;">How does quantitative easing affect other countries? Current macroeconomic literature on unconventional monetary policy concentrates mostly on its domestic effects. Existing literature on externalities of quantitative easing is represented only by empirical papers. We construct two-country DSGE model for qualitative and quantitative studying of international effects of quantitative easing. Our model contains the features of models from Sosunov, Zamulin (2007), Corsetti, Pesenti (2008) and Gertler, Karadi (2011). The model is calibrated for the USA and Russia. The problem of quantitative easing externalities differs from the traditional questions of monetary transmission in open economy because quantitative easing doesn&rsquo;t lead to sharp increases in the US money supply. On the other hand, we guess that oil can play an important role in international monetary transmission due to high price of it. We realize that there exist some transmission mechanisms through which quantitative easing can affect other countries but this paper is concentrated on the access to credit and portfolio balance channels. We show that when the Fed begins conducting quantitative easing during the crisis, providing commercial banks with additional funds, they restore crediting of both American and Russian firms. Better access to credit stimulates production in Russia. Crisis simulation shows that the US quantitative easing leads to positive externalities for Russia because it is associated with welfare gains in comparison with conventional monetary policy. Moreover, the US quantitative easing leads to increase in output in Russia, modest appreciation of ruble, expansion of foreign credits for Russian firms and also to reduction in government and private bonds&rsquo; yields and credit spreads in comparison with conventional monetary policy. Our results are supported by the data and by the existing empirical studies. The constructed model can be used both for studying quantitative easing externalities for different countries and studying other transmission mechanisms related to it.</p>