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Winds of tapering, financial gravity and COVID-19

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  • Kirik, Alper
  • Ulusoy, Veysel

Abstract

Real interest rates have fallen dramatically since the early 1980s. Economic theory states that lower real rates discourage savings while promoting spending. However, today, in the world economy, we face a global saving glut problem in which, even in negative real rates, economic agents keep saving. This situation leads to excess demand for safe assets (US Treasuries), lower bond yields, and higher equity valuations. Thus, the world economy has become more dependent on major economies, especially the United States. In this research, we aim to measure the dependency of the world economy on United States monetary policy. We called this new methodology “financial gravity” and tried to quantify the nature by using panel data analysis. We define monetary dependency (financial gravity) by US Investment flows and their reaction against International Reserves, Credit Default Spreads (CDS), and Foreign Exchange Rates. Our empirical findings support that financial gravity is positively related to international reserves and negatively related to Credit Default Swap Spreads (CDS) and Foreign Exchange rates. We also analyzed the COVID-19 period and found that pandemics positively contributed to world reserve accumulation due to economic lock-down measures, fiscal stimulus packages (unemployment benefits), and decreased global spending.

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  • Kirik, Alper & Ulusoy, Veysel, 2022. "Winds of tapering, financial gravity and COVID-19," The North American Journal of Economics and Finance, Elsevier, vol. 62(C).
    • Handle: RePEc:eee:ecofin:v:62:y:2022:i:c:s1062940822000699
    DOI: 10.1016/j.najef.2022.101719
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    2. Pick-Schen Yip & Wee-Yeap Lau & Robert Brooks, 2023. "The Liquidity Effect of the U.S. QE on Sovereign Yield Spreads of Commodity-Exporting Countries," Commodities, MDPI, vol. 2(2), pages 1-16, April.

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