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

Abstract

This paper examines unconventional monetary policy (UMP) spillovers between advanced economies, exploiting the asynchronous timing of policy normalization to shed light on the term structure implications of UMP divergence. Using high frequency data to identify monetary policy and contemporaneous news, I find that spillovers increase during UMP and strengthen during asynchronous normalization. In fact, these spillovers in the asynchronous period appear to drive the increase in post-Lehman spillovers found elsewhere in the literature. Using a shadow rate term structure model, I find that international spillovers manifest through term premia, particularly at the effective lower bound. Identifying target, forward guidance, and Quantitative Easing (QE) shocks suggests term premium effects arise from QE and forward guidance, while target shocks do not generate spillovers.

The Financial Market Effects of Unwinding the Federal Reserve’s Balance Sheet

“…Balance sheet normalization was conducted during a period of relative calm, whereas the Federal Reserve's asset purchases were carried out amid severe economic and financial strain. And, unlike much of the QE era where central banks were easing in unison, balance sheet normalization was carried out in isolation in the U.S., while other major central banks were maintaining or expanding the size of their balance sheets (Dilts-Stedman, 2019).…”

Unconventional monetary policy and international equity capital flows to emerging markets

“…The majority of the existing literature is centred on Fed monetary policy (e.g., Chari et al, 2020;Dahlhaus & Vasishtha, 2020;Gamboa-Estrada, 2020;Koepke, 2018), whereas evidence from other major central banks is limited despite their important role in the global financial cycle (Chari et al, 2020;Dilts-Stedman, 2019;Fratzscher et al, 2016). We fill this gap by analyzing the impact of monetary policies of two other major central banks in addition to Fed, namely, the European Central Bank (ECB) and the Bank of Japan (BoJ).…”