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Working Paper Series no. 701: Impact of the ECB Quantitative Easing on the French International Investment Position

This paper aims at estimating the impact of the recent Asset Purchase Programs implemented by the ECB - known as Quantitative easing (QE) - on external assets and liabilities recorded in one economy’s International Investment Position (IIP). Our analysis focused on the case of France. We start by describing the recent evolution of the four main items constituting the French IIP; namely Portfolio Investments, Other Investments, Derivatives and Direct Investments. We observe ample, albeit temporary, variations of these items surrounding QE programs. This analysis is complemented by an econometric approach in which we consider as QE variables both the announcements of the programs and their actual implementation. QE measures do impact all the items of the French IIP. Announcements –and particularly the one of January 2015– play a stronger role compared to the amounts purchased. We also decompose changes in the IIP into flows and valuation effects and show that the latter is the most reactive to QE measures. Finally, we establish counterfactual scenarios to quantify what France’s IIP would have been in the absence of QE. The strong impact observed following the announcement of January 2015 is rapidly counterbalanced; which suggests an over-adjustment phenomenon at the beginning of the program. This analysis allows estimating the outcome of the policy on the net IIP and thus on international wealth transfer. Consistently with our previous findings, we observe a robust impact at the beginning of the program which is then partly offset.

In this paper we estimate the impact of the Quantitative Easing (QE) led by the European Central Bank (ECB) since the end of 2014 on French external assets and liabilities recorded in its International Investment Position (IIP). The IIP is an indicator of one economy’s net external debt towards the rest of the world and therefore reflects its financial health. In addition, net changes in the external position may be analyzed in terms of wealth transfers (Gourinchas and Rey 2012).Whereas a large literature has emerged on the impact QE programs have on macro-financial variables such as interest rates, prices or exchange rates; to our knowledge, the critical issue to what extent these measures could affect one economy’s IIP has so far been ignored. Our paper contributes to fill this gap.

We first lead a descriptive analysis to establish the evolution of the four main items of the IIP– Portfolio Investments, Other Investments, Derivatives and Direct Investments. We are particularly interested by a potential breakpoint on the first quarter of 2015 during which the Expanded Asset Purchase Program (EAPP), seen as the most important one in terms of amplitude and extent, has been both announced and officially launched. We do observe large disruptive movements on the various lines of the position - especially on Portfolio and Other Investments - during this specific quarter. The effect is temporary as movements in the opposite direction are observable on the following quarters. To better understand the mechanisms at play, we decompose the changes in the position into financial flows (composition effect) and price movements in the foreign exchange rates and security markets (valuation effect). Exchange rate and price effects seem more sensitive to the monetary policy; with highly volatile values around the first quarter of 2015.

To confirm and extend these results we econometrically test the relationship. We distinguish in our QE variables the main announcements of the programs from their actual implementation. QE measures do significantly impact all the items of the French IIP; with a predominant impact on Portfolio Investments. If both announcements and implementation matter, the former have a stronger impact. In particular, the January 2015 announcement has substantial and robust effects on the various items. For instance, the sole EAPP announcement increased foreign Portfolio assets by around 257 EUR billion, whereas the total amount purchased impacted this item by barely 120 EUR billion during the whole analyzed period. We also run distinct regressions on the three elements driving the changes in the external position –flows, price and exchange rate valuation components. All of them react to at least one of the QE measures. The price valuation component seems nonetheless the most sensitive for Portfolio Investments and Derivatives; whereas the effects transmit more through flows for Other Investments.

We finally build counterfactual scenarios to estimate what the French IIP would have been in absence of QE. This exercise enables to gauge the total impact of the purchase program and its evolution over time. We demonstrate that the strong impact observed on the first quarter of 2015 is rapidly counterbalanced for all the lines of the position except Other Investments; which could indicate an over-adjustment phenomenon at the beginning of the program. This approach also allows to estimate the outcome on the net IIP and thus on the international wealth transfer. Consistently with our previous findings, we observe a robust impact at the beginning of the period which is then partially offset. If the whole period is taken into account the program results into a weak and negative transfer from France to the rest of the world.

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Working Paper Series no. 701: Impact of the ECB Quantitative Easing on the French International Investment Position
  • Published on 11/23/2018
  • EN
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Updated on: 11/23/2018 10:51