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The COVID-19 pandemic led many emerging market central banks to adopt, for the first time, unconventional policies in the form of asset purchase programs. In this study, we analyze the effects of these announcements on domestic financial markets using both event studies and local projections methodology. We find that these asset purchase announcements lowered bond yields, did not lead to a depreciation of domestic currencies, and did not have much effect on equities. While the immediate effect of asset purchases appears positive, further consideration of the risks and longer-term effects of unconventional monetary policies is needed. We highlight the trade-offs involved with the implementation of these measures, and discuss their risks. This working paper adds to the debate on how asset purchase programs should be a regular part of the emerging market policy toolkit.

Banks and Banking --- Finance: General --- Investments: Bonds --- Money and Monetary Policy --- Money Supply --- Credit --- Money Multipliers --- Central Banks and Their Policies --- International Finance: General --- Information and Market Efficiency --- Event Studies --- International Financial Markets --- General Financial Markets: General (includes Measurement and Data) --- Interest Rates: Determination, Term Structure, and Effects --- Monetary Systems --- Standards --- Regimes --- Government and the Monetary System --- Payment Systems --- Finance --- Investment & securities --- Banking --- Monetary economics --- Bond yields --- Yield curve --- Central bank policy rate --- Stock markets --- Currencies --- Interest rates --- Bonds --- Stock exchanges --- Money --- South Africa

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This paper reviews the role of benchmark-driven investments in EM local bond markets. We provide an overview of how key EM bond benchmark indices are constructed, how they affect the behavior of investment funds, and what are the likely implications for capital flows and policy-making. Several methods are presented suggesting that the amount of assets benchmarked against widely followed EM local-currency bond indices have risen fivefold since the mid-2000s to around $300 billion. Our review suggests that the benefits of index membership may be tempered by portfolio outflow risks for some countries. This is because benchmark-driven investments may increase the importance of external factors at the expense of domestic factors, raising the risks of outflows unrelated to recipient country fundamentals. Some countries may be disproportionately exposed to these risks, reflecting the way the indices are constructed.

United States --- Exports and Imports --- Finance: General --- Investments: Bonds --- Industries: Financial Services --- Financial Crises --- Portfolio Choice --- Investment Decisions --- General Financial Markets: General (includes Measurement and Data) --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- International Investment --- Long-term Capital Movements --- Finance --- Investment & securities --- International economics --- Emerging and frontier financial markets --- Bonds --- Mutual funds --- Securities markets --- Capital flows --- Financial markets --- Financial institutions --- Balance of payments --- Financial services industry --- Capital market --- Capital movements