International Channels of the Fed’s Unconventional Monetary Policy
FRB of St. Louis Working Paper No. 2012-028D
45 Pages Posted: 29 Aug 2012 Last revised: 19 Feb 2014
Date Written: December 12, 2013
Previous research has established that the Federal Reserve’s large scale asset purchases (LSAPs) significantly influenced international bond yields. We use dynamic term structure models to uncover to what extent signaling and portfolio balance channels caused these declines. For the U.S. and Canada, the evidence supports the view that LSAPs had substantial signaling effects. For Australian and German yields, signaling effects were present but likely more moderate, and portfolio balance effects appear to have played a relatively larger role than in the U.S. and Canada. Portfolio balance effects were small for Japanese yields and signaling effects basically nonexistent. These findings about LSAP channels are consistent with predictions based on interest rate dynamics during normal times: Signaling effects tend to be large for countries with strong yield responses to conventional U.S. monetary policy surprises, and portfolio balance effects are consistent with the degree of substitutability across nternational bonds, as measured by the covariance between foreign and U.S. bond returns.
Keywords: Monetary policy, zero lower bound, LSAP, signaling, portfolio balance, dynamic term structure model
JEL Classification: E43, E52
Suggested Citation: Suggested Citation