How Does Inflation in Advanced Economies Affect Emerging Market Bond Yields? Empirical Evidence from Two Channels

Sei-Wan Kim (), Donghyun Park and Shu Tian ()
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Sei-Wan Kim: Ewha Womans University
Shu Tian: Asian Development Bank

No 695, ADB Economics Working Paper Series from Asian Development Bank

Abstract: Increasing oil and food prices and persistent supply chain disruptions in 2022 contributed to inflation in advanced economies that had not been seen in decades. This pushed up interest rates, which in turn led to higher yields in global bond markets. This study examines two distinct channels that transmit advanced economy inflation to emerging market bond yields by employing a novel multivariable smooth transition autoregressive–vector autoregressive (STAR-VAR) model. Our empirical analysis yields two new key findings. First, advanced economy inflation has a significant effect on regime changes between expansion and contraction in emerging market bond yields. Second, the shortrun effect of advanced economy inflation on the bond yields of emerging markets is asymmetric between the expansion and contraction regimes. The effect is mostly positive in both regimes but stronger in a bond yield’s contraction regime. This suggests that the response of emerging market bond yields to advanced economy inflation does not necessarily follow a simple Fisher equation relationship.

Keywords: bond yields; inflation; advanced economy; emerging market; regime change; smooth transition autoregressive model (search for similar items in EconPapers)
JEL-codes: C40 C51 F14 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2023-09-29
New Economics Papers: this item is included in nep-ban, nep-opm and nep-sea
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Persistent link: https://EconPapers.repec.org/RePEc:ris:adbewp:0695

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