Spillovers of US Unconventional Monetary Policy to Asia: The Role of Long-Term Interest Rates

40 Pages Posted: 7 Jan 2015

See all articles by Ken Miyajima

Ken Miyajima

Bank for International Settlements (BIS) - Monetary and Economic Department

Madhusudan S. Mohanty

Bank for International Settlements (BIS) - Monetary and Economic Department

James Yetman

Bank for International Settlements (BIS)

Date Written: December 2014

Abstract

This paper reviews the role of long-term interest rates in international monetary transmission and related policy challenges in the wake of exceptionally easy US monetary policy. It employs a panel VAR model to examine the impact of a very low US term premium on relatively small open Asian economies. The results show that unconventional US monetary policy spills over to Asia mainly through low domestic bond yields and rapid growth of domestic bank credit. Financial integration does not appear to reduce the control of national monetary authorities over short-term policy rates. However, it does compromise control over long-term rates that are key determinants of economic activity. In light of the results, the paper reviews potential policy options to deal with volatile term and risk premiums.

Keywords: Asian economies, international monetary transmission, long term interest rates, monetary policy, risk premium

JEL Classification: E43, E52, E53, F42

Suggested Citation

Miyajima, Ken and Mohanty, Madhusudan S. and Yetman, James, Spillovers of US Unconventional Monetary Policy to Asia: The Role of Long-Term Interest Rates (December 2014). BIS Working Paper No. 478, Available at SSRN: https://ssrn.com/abstract=2542229

Ken Miyajima (Contact Author)

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Madhusudan S. Mohanty

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

James Yetman

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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