Independent policy, dependent outcomes: A game of cross-country dominoes across European yield curves

Alexis Stenfors, Ioannis Chatziantoniou and David Gabauer

Journal of International Financial Markets, Institutions and Money, 2022, vol. 81, issue C

Abstract: This study investigates the dynamic transmission mechanism between 2Y, 5Y and 10Y interest rate swaps (IRS) for six European currencies (CHF, DKK, EUR, GBP, NOK and SEK) from August 6, 1999 to March 4, 2021 applying the time-varying parameter vector autoregressive connectedness approach in the spirit of Antonakakis et al. (2020). Furthermore, we propose a novel conditional connectedness approach that extends the original framework (Diebold and Yilmaz, 2012, 2014) by analysing dynamic connectedness measures in more depth and improving the interpretability of information concerning the cross-maturity/cross-currency propagation mechanism. We document that EUR and DKK have been the most prominent transmitters of shocks in the network. We also find that the 10Y IRS has increasingly assumed a net-transmitting role at the expense of the 2Y IRS—in line with a shift towards unconventional monetary policy and quantitative easing. From a policy-making perspective, this implies means that the role of the domestic short-term interest rate has become significantly less relevant for the monetary transmission mechanism at the expense of the foreign long-term interest rate.

Keywords: Dynamic connectedness; Aggregated connectedness; Conditional connectedness; Interest rate swaps; TVP-VAR; Yield curves (search for similar items in EconPapers)
JEL-codes: C32 C5 F3 G15 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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Working Paper: Independent Policy, Dependent Outcomes: A Game of Cross-Country Dominoes across European Yield Curves (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:81:y:2022:i:c:s1042443122001305

DOI: 10.1016/j.intfin.2022.101658

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