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Unconventional Monetary Policy and Bond Market Connectedness in the New Normal

Umut Akovali () and Kamil Yilmaz ()
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Umut Akovali: Koc University

Koç University-TUSIAD Economic Research Forum Working Papers from Koc University-TUSIAD Economic Research Forum

Abstract: Since the global financial crisis, major central banks gradually switched to unconventional monetary policies (UMPs) as part of their efforts to directly influence the long-term interest rates. This study analyzes the impact of conventional/unconventional monetary policies on sovereign bond return spillovers across countries and maturities since February 2007. Following the Taper Tantrum of mid-2013 and the ECB’s policy convergence to other major central banks in 2015, the long-term return connectedness across countries increased, overtaking the short-term connectedness and lowering the dispersion of connectedness measures across maturities. Over the same period, net connectedness from short- to long-term maturities weakens, while net connectedness from medium- to long-term maturities stays strong. Finally, panel regression results show that UMPs in the form of higher central bank asset ratios led to higher pairwise long-term return connectedness even when the control variables such as trade and portfolio investment flows and the distance between pairs of countries are included in regression analysis.

Keywords: Unconventional monetary policy; quantitative easing; yield curve; vector autoregression; variance decomposition; elastic net. (search for similar items in EconPapers)
JEL-codes: C32 F34 G15 G23 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2021-03
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:koc:wpaper:2101

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