International Financial Transmission of the US Monetary Policy: An Empirical Assessment

Nikola Mirkov

No 1201, Working Papers on Finance from University of St. Gallen, School of Finance

Abstract: This paper proposes a way to study the transmission mechanism of the US monetary policy to foreign yield curves. It elaborates the high-frequency identification of monetary policy shocks from Piazzesi (2005) in an international setting and uses a sample of 125 policy rate decisions of the Fed to extract realised policy shocks. The Fed decisions span from February 1994 to December 2008 and are divided according to the direction of the policy rate move and weather they were anticipated by the Fed funds futures market. A consistent, two-country term structure model is estimated on daily data and used to assess both instantaneous and lagged reaction of foreign interest rates and forward term premia to the Fed policy rate decisions. Empirical analysis of the US - UK model shows that the most of the movement in the UK yields around policy action days results from estimated term premia. A surprise policy action seems to produce a spike in the UK premia around the short- and mid-range maturities, independently from the direction of the policy rate move. The estimated lagged reaction of the UK yields to a policy decision of the Fed is also negative, after both hikes and cuts of the policy rate. The results hold for different market price of risk specifications, after two robustness checks and for both two-country and single-country model output.

Keywords: term premia; two countries; Fed; policy actions; principal components. (search for similar items in EconPapers)
JEL-codes: C11 E43 E52 F31 G12 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2012-01
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://ux-tauri.unisg.ch/RePEc/usg/sfwpfi/WPF-1201.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:usg:sfwpfi:2012:01

Access Statistics for this paper

More papers in Working Papers on Finance from University of St. Gallen, School of Finance Contact information at EDIRC.
Bibliographic data for series maintained by ().