Decomposing Long-Term Interest Rates: An International Comparison
This work analyzes the behavior of long-term interest rates for several economies, identifying the risk neutral and term premium components under different methodologies. With this, we analyze which of these two channels affected interest rate movements in different monetary policy regimes. Also, we quantify the transmission of US long-term yield to others economies using the spillovers index proposed by Diebold & Yilmaz (2009). We find that movements in long-term interest rates (respect to the pre-crisis period 2003-2007) in different monetary policy regimes are related to changes in the term premium for most countries. Also, our findings suggest a heterogeneous behavior in the US to other economies. In developed economies, long-term interest rates are affected in both components (risk neutral and term premium) mainly through the US risk-neutral channel; whereas in developing countries, the evidence suggests that the relevant transmission channel is the term premium which is affected by US term premium.
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