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US Monetary Policy, Global Risk Aversion, and New Zealand Funding Conditions




Instrumenting US monetary shocks with fed funds future contracts and extracting global risk sentiment from VIX, this paper uses a structural vector autoregression framework to estimate the causal impact of US monetary policy on New Zealand financial and real sectors. The paper finds that 20 basis points increase in US one-year rate leads to about 14 and 59 percent increase in domestic and external funding spreads of New Zealand banks, respectively. The paper also finds that credit default swap spread rises contemporaneously following a US monetary tightening shock. Similar patterns are documented in Australia, Canada, Sweden and United Kingdom. These results suggest the existence of a global financial cycle underpinned by US monetary policy, and prompt the reassessment of the relevance of Mundellian trilemma in an increasingly globalised economic system.

Suggested Citation

  • Eric Tong, 2018. "US Monetary Policy, Global Risk Aversion, and New Zealand Funding Conditions," Treasury Working Paper Series 18/04, New Zealand Treasury.
  • Handle: RePEc:nzt:nztwps:18/04

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    References listed on IDEAS

    1. Bekaert, Geert & Hoerova, Marie & Lo Duca, Marco, 2013. "Risk, uncertainty and monetary policy," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 771-788.
    2. Tim Bollerslev & George Tauchen & Hao Zhou, 2009. "Expected Stock Returns and Variance Risk Premia," Review of Financial Studies, Society for Financial Studies, vol. 22(11), pages 4463-4492, November.
    3. Bekaert, Geert & Hoerova, Marie, 2014. "The VIX, the variance premium and stock market volatility," Journal of Econometrics, Elsevier, vol. 183(2), pages 181-192.
    4. Mizen, Paul & Tsoukas, Serafeim, 2012. "The response of the external finance premium in Asian corporate bond markets to financial characteristics, financial constraints and two financial crises," Journal of Banking & Finance, Elsevier, vol. 36(11), pages 3048-3059.
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    More about this item


    US monetary policy; risk aversion; NZ funding conditions;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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