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

While the Federal Reserve raises short-term interest rates away from the zero lower bound, long-term bond yields appear less responsive, leading to a flattening of the yield curve. This paper examines international spillovers from unconventional monetary policy between the US, Euro area, UK and Japan, focusing on the effect of exit timing on the term structure of interest rates. Using high frequency futures data to identify monetary policy surprises and controlling for contemporaneous news, I find that spillovers increase during the period of asynchronous policy normalization, wherein the term premium gains importance in driving spillovers compared to previous periods. Local projections suggest persistent spillovers from the Federal Reserve, whereas other spillovers fade quickly. Through the lens of a shadow rate term structure model (SRTSM), I find that these surprises elicit, domestically and internationally, revisions to both the expected path of short-term interest rates and required risk compensation.

Fields

International finance, International economics, Macroeconomics

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