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International channels of the Fed’s unconventional monetary policy

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  • Michael D. Bauer
  • Christopher J. Neely

Abstract

Previous research has established that the Federal Reserve large scale asset purchases (LSAPs) significantly influenced international bond yields. This paper analyzes the channels through which these effects occurred. We use dynamic term structure models to decompose international yield changes into changes in term premia and expected short rates. The conclusions for most countries are model dependent. Models that impose a unit root tend to imply large signaling effects for Australia, Canada, Germany and the United States. Models that do not restrict persistence imply negligible signaling effects for any country. Our preferred bias-corrected model implies large signaling effects for Canada and the United States. The idea that LSAP announcements signal information about Canadian rates is intuitively attractive because conventional US monetary policy shocks strongly predict Canadian rates.

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Bibliographic Info

Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2012-12.

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Date of creation: 2012
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Handle: RePEc:fip:fedfwp:2012-12

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Keywords: Monetary policy ; Bonds ; International finance;

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  1. Refet S Gürkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
  2. Christopher J. Neely, 2010. "The large scale asset purchases had large international effects," Working Papers 2010-018, Federal Reserve Bank of St. Louis.
  3. Fawley, Brett W. & Neely, Christopher J., 2013. "Four stories of quantitative easing," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 51-88.
  4. Jens H. E. Christensen & Glenn D. Rudebusch, 2012. "The Response of Interest Rates to US and UK Quantitative Easing," Economic Journal, Royal Economic Society, vol. 122(564), pages F385-F414, November.
  5. Joshua Hausman & Jon Wongswan, 2006. "Global asset prices and FOMC announcements," International Finance Discussion Papers 886, Board of Governors of the Federal Reserve System (U.S.).
  6. James D. Hamilton & Jing Cynthia Wu, 2011. "The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment," NBER Working Papers 16956, National Bureau of Economic Research, Inc.
  7. Michael D. Bauer & Glenn D. Rudebusch & Jing Cynthia Wu, 2012. "Correcting Estimation Bias in Dynamic Term Structure Models," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 30(3), pages 454-467, April.
  8. Carlo Rosa, 2012. "How "unconventional" are large-scale asset purchases? The impact of monetary policy on asset prices," Staff Reports 560, Federal Reserve Bank of New York.
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Cited by:
  1. Masazumi Hattori & Andreas Schrimpf & Vladyslav Sushko, 2013. "The response of tail risk perceptions to unconventional monetary policy," BIS Working Papers 425, Bank for International Settlements.
  2. Neely, Christopher J., 2014. "How Persistent are Monetary Policy Effects at the Zero Lower Bound?," Working Papers 2014-4, Federal Reserve Bank of St. Louis.
  3. Dong He & Robert N McCauley, 2013. "Transmitting global liquidity to East Asia: policy rates, bond yields, currencies and dollar credit," BIS Working Papers 431, Bank for International Settlements.
  4. Rossi, José Luiz Júnior, 2013. "Liquidity and Exchange Rates," Insper Working Papers wpe_325, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  5. Fratzscher, Marcel & Lo Duca, Marco & Straub, Roland, 2012. "A global monetary tsunami? On the spillovers of US Quantitative Easing," CEPR Discussion Papers 9195, C.E.P.R. Discussion Papers.
  6. Marcel Fratzscher & Marco Lo Duca & Roland Straub, 2013. "On the International Spillovers of US Quantitative Easing," Discussion Papers of DIW Berlin 1304, DIW Berlin, German Institute for Economic Research.
  7. Rossi, José Luiz Júnior, 2014. "The Usefulness of Financial Variables in Predicting Exchange Rate Movements," Insper Working Papers wpe_332, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.

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