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Channels of US Monetary Policy Spillovers into International Bond Markets

Listed author(s):
  • Elías Albagli
  • Luis Ceballos
  • Sebastián Claro
  • Damián Romero

We document significant US monetary policy spillovers to domestic bond markets in a sample of 24 countries, including 12 developed and 12 emerging market economies. We rely on an event study methodology where US monetary policy changes are identified as the response of short-term US treasury yields within a narrow window of Federal Reserve meetings, and trace its consequences on domestic bond yields using panel data regressions. We decompose yields for each country into a risk neutral and a term premium component, using the methodology developed by Adrian et al. (2013). We emphasize three main results. First, spillovers to long-term rates in our sample of countries has increased substantially after the global financial crisis: a 100 bp increase in US short-term rates during monetary policy meetings is associated with increases between 70-80 bp on international bond yields. Second, these effects work through markedly different channels on different country groups: while the effects in developed economies work mostly through risk neutral rates -associated with signaling effects in the course of future monetary policy-, spillovers to emerging countries are concentrated predominantly on the term premium channel -associated with portfolio rebalancing effects. Third, these spillovers are large compared to the effects of other events, and at least as large as the effects of domestic MP in long-term rates after 2008.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 771.

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Date of creation: Sep 2015
Handle: RePEc:chb:bcchwp:771
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  1. Craine, Roger & Martin, Vance L., 2008. "International monetary policy surprise spillovers," Journal of International Economics, Elsevier, vol. 75(1), pages 180-196, May.
  2. Georgiadis, Georgios, 2016. "Determinants of global spillovers from US monetary policy," Journal of International Money and Finance, Elsevier, vol. 67(C), pages 41-61.
  3. John H. Rogers & Chiara Scotti & Jonathan H. Wright, 2014. "Evaluating asset-market effects of unconventional monetary policy: a multi-country review," Economic Policy, CEPR;CES;MSH, vol. 29(80), pages 749-799, October.
  4. Rey, Hélène, 2015. "Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence," CEPR Discussion Papers 10591, C.E.P.R. Discussion Papers.
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  14. 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 385-414, November.
  15. Joseph Gagnon & Matthew Raskin & Julie Remache & Brian Sack, 2011. "The Financial Market Effects of the Federal Reserve's Large-Scale Asset Purchases," International Journal of Central Banking, International Journal of Central Banking, vol. 7(1), pages 3-43, March.
  16. Hanson, Samuel G. & Stein, Jeremy C., 2015. "Monetary policy and long-term real rates," Journal of Financial Economics, Elsevier, vol. 115(3), pages 429-448.
  17. Ahmed, Shaghil & Zlate, Andrei, 2014. "Capital flows to emerging market economies: A brave new world?," Journal of International Money and Finance, Elsevier, vol. 48(PB), pages 221-248.
  18. Gregory R. Duffee, 2002. "Term Premia and Interest Rate Forecasts in Affine Models," Journal of Finance, American Finance Association, vol. 57(1), pages 405-443, 02.
  19. Monika Piazzesi, 2002. "The Fed and Interest Rates - A High-Frequency Identification," American Economic Review, American Economic Association, vol. 92(2), pages 90-95, May.
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