Measuring Monetary Policy Spillovers between U.S. and German Bond Yields

Abstract

In this paper we estimate the magnitude of spillovers between bond markets in the U.S. and Germany following monetary policy communications by the FOMC and the ECB. The identification of policy-related co-movements following FOMC announcements, in particular, can be difficult because many foreign bond markets, including those in Germany, are closed at the time of the announcement. To address this issue we use intraday futures market data to estimate spillovers during a narrow and overlapping event window. We find that about half of the reaction in German domestic yields spills over to U.S. yields following ECB announcements, which is nearly identical to the spillover from U.S. yields to German Bund yields following FOMC announcements. This result contrasts with the conventional wisdom that FOMC announcements spill over to other countries but that there is not much effect in the other direction. We also find that spillover estimates are slightly higher in the post-crisis period, but that there is little difference in the spillover impact of conventional versus unconventional monetary policy. Our results based on futures prices differ noticeably from those using daily prices, which suggests that spillover estimates based on cash market data can be misleading.

Interest Rate and Exchange Rate Volatility Spillovers: Multiscale Perspective of Monetary Policy Transmission in Ghana

“…Given that , when , for , converges in distribution to the standard normal: (15) where the asymptotic variance of is given by .…”

“…Therefore, VD is utilized to adequately capture system or macro interdependence/connectedness Yilmaz, 2012, 2009). By summing up information in VD 15 , one can quantify how the system is interconnected. For robustness, we apply both the Diebold and Yilmaz (2012) and Barunik and Krehlik (2015) methodologies which focus on time-domain and frequency-domain respectively.…”

Unconventional Monetary Policy, (A)Synchronicity and the Yield Curve

“…6 However, the nearest neighbors of this paper compare the magnitude of sovereign bond yield spillovers from unconventional monetary policy among multiple advanced economy central banks (Rogers et al 2014(Rogers et al , 2016Kearns et al 2018;Shah 2018;Zhang 2018). While Rogers et al (2014), Fratzscher et al (2017) and Shah (2018) find that the Federal Reserve uniquely propagates cross-border yield curve spillovers, Rogers et al (2018), Kearns et al (2018) Curcuru et al (2018a), and Zhang (2018) find a role for other advanced economy central banks in influencing long-term bond yields internationally.…”

“… See Nakamura and Steinsson (2015) andCurcuru et al (2018a) for more work in this area.13 Bernoth and Von Hagen (2004), for example, find that the three month Euribor futures rate is an unbiased predictor of Euro area policy rate changes.…”

International Spillovers of Monetary Policy: Conventional Policy vs. Quantitative Easing

“…However, this study does not control for the size of these announcements, as measured by their effects on domestic Treasury yields. Conversely, Rogers, Scotti, and Wright (2016a), Ferrari, Kearns, and Schrimpf (2017), Curcuru, De Pooter, and Eckerd (2018), and Gilchrist, Yue, and Zakrajsek (2018) measure of the size of the monetary policy action being announced by its impact on domestic sovereign yields, and then look at the sensitivity of foreign market variables to changes in those yields; for the most part, they find little difference in the response of the dollar and/or foreign yields to movements in domestic yields following QE-related and more conventional policy announcements. Bowman, Londono, and Sapriza (2015) likewise measure the responses of foreign sovereign yields to FOMC unconventional policy announcements; they find that these responses align well with the predictions of a model relating foreign to changes in U.S. yields, estimated over the period 2006-2013.…”