International and Monetary Economics Network (IMEN): What motivated you to start the paper “Asset Purchase Programs and the Exchange Rate”?
Sinem Toraman: Before the pandemic, asset purchase programs (APPs) were mainly used by advanced economies (AEs), mostly to provide monetary stimulus when policy rates had reached the zero lower bound. During COVID-19, however, many emerging markets (EMs) implemented APPs for the first time, and often with a different motivation: financial stability concerns rather than conventional monetary easing.
Exchange rates are particularly important for emerging markets (EMs). They are a key transmission channel of monetary policy, with direct implications for inflation due to the higher share of tradable goods in consumption baskets. Exchange rates also matter for financial stability because of currency mismatches on balance sheets in the financial sector.
This shift in both who was using APPs and why they were using them motivated me to ask: How do these programs affect exchange rates, especially in EMs?
IMEN: What would you consider the most relevant finding(s) of your paper?
The key finding of the paper is that financial-stability QE operates differently from conventional monetary-policy QE. I show that APPs in EMs can appreciate the exchange rate by reducing sovereign credit risk. This is important because it suggests that these policies can help EMs to stabilize exchange rates during periods of distress, without necessarily implementing foreign exchange intervention. Interestingly, we also find some suggestive evidence of similar mechanisms in AEs, for example, in the case of the Bank of England (see Alessandro Rebucci and Sinem Yagmur Toraman (2022): “Financial-Stability QE Can Appreciate the Exchange Rate”).
IMEN: Would you expect analogous results for quantitative tightening?
This is part of my ongoing research agenda. I am currently interested in examining tightening episodes to provide a full-cycle analysis. That said, I would not necessarily expect symmetric results. As emphasized in Wright (2022), QE and QT differ in several important ways: (i) QE is often implemented during periods of financial instability, whereas QT typically occurs in more stable economic landscape, (ii) QE can reinforce forward guidance and influence expectations about the future policy path, while QT is usually explicitly separated from policy rate guidance, (iii) historically, QE occurred at or near the zero lower bound, whereas QT is taking place away from it. These asymmetries suggest that balance sheet expansions and contractions may not mirror each other in their effects.
IMEN: Do you have other projects in the pipeline we can look forward to?
Yes, several. Building on this project, I am interested in comparing foreign exchange intervention (FXI) and QE in EMs, as well as studying the interaction between swap lines and QE in AEs. More broadly, I am currently working on: (i) Long-run uncovered interest parity (LR-UIP) deviations in EMs, (ii) The effects of geopolitical risk and trade policy uncertainty on exchange rates and international capital flows.
In these projects, I aim to better understand exchange rate dynamics in a world characterized by heightened uncertainty. In such an environment, countries at different stages of development face distinct challenges, and their policy responses evolve as crises unfold. Understanding these heterogeneous and dynamic responses is essential for designing policies that enhance macro-financial resilience.
