Asset purchases in emerging markets: Unconventional policies, unconventional times

To stabilize financial markets and support activity in response to the COVID-19 pandemic, many central banks have employed asset purchase programs—in the case of several emerging markets and developing economies (EMDEs), for the first time. Although these programs appear to have initially helped to lower government bond yields, their broader macroeconomic consequences have yet to be seen. The programs present risks if they are perceived to be financing unsustainable fiscal deficits, or if they are expanded in the absence of the uniquely accommodative macroeconomic policies enacted by advanced economies. Embedding asset purchase programs in a transparent monetary policy framework that is consistent with inflation and financial stability objectives will reduce these risks. 

A diverse set of program designs

In 2020, central banks in 18 EMDEs announced or implemented asset purchase programs focused on local currency government bonds. The size of purchases varied from less than 1% to 6% of GDP, significantly smaller than the programs launched in advanced economies. In some cases, however, the asset purchases continue to grow. Many EMDE central banks have not announced the scale or duration of purchases. While most have been purchasing only in secondary markets, some have purchased bonds directly from governments with the objective of financing rising fiscal deficits.

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