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The yield curve in a small open economy

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  • Kulish, Mariano
  • Rees, Daniel

Abstract

Long-term nominal interest rates in a number of inflation-targeting small open economies have tended to be strongly correlated with those of the United States. This observation has recently led support to the view that, in these economies, the long-end of the yield curve has decoupled from its short-end and naturally to a concern that monetary policy may have lost some of its autonomy. We set up and estimate a two-country small open economy model in which the expectations hypothesis and uncovered interest rate parity hold to study the co-movement of long-term nominal interest rates of different currencies. We show that differences in the persistence of domestic and foreign disturbances, a hypothesis for which we find support in recent data, can explain the observed pattern of correlations. These correlations are not evidence of weaker monetary policy.

Suggested Citation

  • Kulish, Mariano & Rees, Daniel, 2011. "The yield curve in a small open economy," Journal of International Economics, Elsevier, vol. 85(2), pages 268-279.
  • Handle: RePEc:eee:inecon:v:85:y:2011:i:2:p:268-279
    DOI: 10.1016/j.jinteco.2011.06.006
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    Cited by:

    1. Kiryoung LEE & Chanik JO, 2018. "Forecasting Chinese Business Cycle Using Long-term Interest Rate Comovements," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 118-134, December.
    2. Kwan Soo Bong & Taeyoung Doh & Woong Yong Park, 2014. "Yield curve and monetary policy expectations in small open economies," Research Working Paper RWP 14-13, Federal Reserve Bank of Kansas City.
    3. Michael Chin & Thomai Filippeli & Konstantinos Theodoridis, 2015. "Cross-Country Co-movement in Long-Term Interest Rates: A DSGE Approach," Working Papers 753, Queen Mary University of London, School of Economics and Finance.
    4. Syed Kanwar Abbas & Prasad Sankar Bhattacharya & Debdulal Mallick & Pasquale Sgro, 2016. "The New Keynesian Phillips Curve in a Small Open Economy: Empirical Evidence from Australia," The Economic Record, The Economic Society of Australia, vol. 92(298), pages 409-434, September.
    5. Lange, Ronald H., 2014. "The small open macroeconomy and the yield curve: A state-space representation," The North American Journal of Economics and Finance, Elsevier, vol. 29(C), pages 1-21.
    6. Daniel M. Rees & Penelope Smith & Jamie Hall, 2016. "A Multi-sector Model of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 92(298), pages 374-408, September.
    7. Ilek, Alex & Rozenshtrom, Irit, 2018. "The term premium in a small open economy: A micro-founded approach," International Review of Economics & Finance, Elsevier, vol. 57(C), pages 333-352.
    8. Lange, Ronald H., 2013. "The Canadian macroeconomy and the yield curve: A dynamic latent factor approach," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 261-274.
    9. Christopher G Gibbs & Jonathan Hambur & Gabriela Nodari, 2018. "DSGE Reno: Adding a Housing Block to a Small Open Economy Model," RBA Research Discussion Papers rdp2018-04, Reserve Bank of Australia.
    10. Stona, Filipe & Caldeira, João F., 2019. "Do U.S. factors impact the Brazilian yield curve? Evidence from a dynamic factor model," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 76-89.
    11. Alex Ilek & Irit Rozenshtrom, 2017. "The Term Premium in a Small Open Economy: A Micro-Founded Approach," Bank of Israel Working Papers 2017.06, Bank of Israel.
    12. Lange, Ronald H., 2017. "The expected real yield and inflation components of the nominal yield curve," The North American Journal of Economics and Finance, Elsevier, vol. 39(C), pages 1-18.
    13. Bernhard, Severin & Ebner, Till, 2017. "Cross-border spillover effects of unconventional monetary policies on Swiss asset prices," Journal of International Money and Finance, Elsevier, vol. 75(C), pages 109-127.
    14. Lange, Ronald H., 2015. "International long-term yields and monetary policy in a small open economy: The case of Canada," The North American Journal of Economics and Finance, Elsevier, vol. 31(C), pages 292-310.
    15. Djuranovik, Leslie, 2014. "The Indonesian macroeconomy and the yield curve: A dynamic latent factor approach," Journal of Asian Economics, Elsevier, vol. 34(C), pages 1-15.
    16. Krishna Prasanna & Subramaniam Sowmya, 2017. "Yield curve in India and its interactions with the US bond market," International Economics and Economic Policy, Springer, vol. 14(2), pages 353-375, April.

    More about this item

    Keywords

    Yield curve; UIP; Small open economy; Monetary policy; Bayesian estimation;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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