Unconventional monetary policy in SE Asia eased market turmoil during Covid-19


CENTRAL banks in some emerging-market (EM) economies engaged in quantitative easing (QE) during the coronavirus disease (Covid-19) pandemic by buying domestic government bonds.

These asset purchase programmes (APPs) were aimed at reducing bond yields, thereby supporting the stability of emerging economy financial markets (EMEs) (International Monetary Fund 2020; World Bank 2021; Asian Development Bank 2021).

Drawing on a forthcoming paper by Beirne and Sugandi (2022), we examine the effectiveness of the monetary policy transmission mechanism of the APPs on bond spreads, both in terms of magnitude and duration over a time horizon.

While the study by Beirne and Sugandi (2022) examined all 14 EMEs that engaged in pandemic-related QE, this article focuses on the four emerging Asian central banks that implemented such operations: Indonesia, Malaysia, Thailand, and the Philippines. In addition, a counterfactual assessment is conducted to assess the additionality of the APPs.

Central bank claims to the central government are used as a proxy indicator of APPs, given that actual purchase data are not publicly available. These claims increased sharply relative to pre-pandemic levels and the growth rate of the claims is assumed to be an adequate approximation for actual asset purchases.

This approach is superior to using a dummy variable for APPs, which is also consistent with our findings but fails to capture the intensity of QE purchases. The empirical work shows that APPs had a statistically significant dampening effect on bond yield spreads during the Covid-19 pandemic.

To quantify the additionality of an APP in terms of transmission to bond spreads (ie 10-year government bond yields relative to those of US Treasuries), the actual bond spreads were compared to spreads that would have prevailed under a scenario without an APP. The “no APP” scenario assumes a trajectory of bond spreads based on pre-pandemic fundamentals (Figure 1).

We find that APPs had varying degrees of bond market additionality across the four South-East Asian economies in our sample. For Thailand and the Philippines, we observe that actual spreads would have been higher without the APPs, while this effect takes time to materialise. The evidence supporting APP effectiveness on this basis is less prevalent in the cases of Indonesia and Malaysia.

To examine the impact more rigorously, we estimate a series of country-specific vector autoregression regression models over the period Jan 7, 2010, to Sept 1, 2021. The responses of bond spreads, as well as exchange rates, to shocks emanating from the APPs are shown in Figures 2 and 3 respectively.

APP shocks lead to compressions in bond spreads in all four Asean economies, although we fail to find a statistically significant result at the 95% confidence level in the case of the Philippines. The magnitude of the bond spread response and its persistence, as regards statistical significance, is most notable for Indonesia.

On the other hand, the bond spread reactions for Malaysia and Thailand remain significant only in the immediate period following the shock. In the case of exchange rate reactions to APP shocks, statistically significant effects are found across all four economies.

As in the case of bond spreads, the highest magnitude of exchange rate deprecation occurs in Indonesia. The size of the depreciation is somewhat lower for Thailand, followed by Malaysia and the Philippines.

Improved institutional development and central bank credibility in the economies in our sample, particularly since the global financial crisis, are important factors underpinning the effectiveness of the APPs. Ample liquidity and higher levels of financial development in the period since the global financial crisis have also contributed to the improved functioning of financial markets in the four economies, thereby supporting monetary policy transmission.

Overall, the evidence suggests that bond spread compressions due to central bank APPs are persistent, while significant stabilising effects are found on exchange rates. Further analysis in the paper by Beirne and Sugandi (2022) shows that the APPs also helped to temper capital flow volatility during the Covid-19 pandemic, while no significant effect was found on inflation expectations. This latter point is particularly important from a monetary policy perspective.

The QE measures were effective in their objective, to varying degrees, of relieving pressure on long-term bond yields and supporting stability in asset markets, while also not aggravating the medium-term inflation outlook.

John Beirne is vice-chair of research and a senior research fellow at ADBI, while Eric Sugandi is a project consultant at ADBI.