International Financial Transmission of the U.S. Monetary Policy: An Empirical Assessment

Abstract

This paper proposes a way to study 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 shocks represent the residuals from a two-country term structure model estimated on the US-UK daily data. All the shocks are classified into groups according to direction of the corresponding policy rate decision and weather the Fed funds futures market anticipated the decision. Allowing for a separate reaction of interest rates to different groups of policy actions explicitly accounts for possible asymmetric response of rates to Fed decisions mentioned in Bernanke and Kuttner (2005). Empirical analysis shows that such asymmetries are non-trivial and might not be captured in a standard VAR analysis.

Keywords: term premia, two countries, Fed, policy actions, principal components

JEL Classification: E43, E52, G12, F31