U.S. Monetary Policy Normalization and Global Interest Rates

47 Pages Posted: 9 Dec 2016

See all articles by Carlos Caceres

Carlos Caceres

International Monetary Fund (IMF)

Yan Carriere-Swallow

International Monetary Fund (IMF)

Ishak Demir

Birkbeck, University of London - Department of Economics; Bilkent University - Department of Economics

Bertrand Gruss

International Monetary Fund (IMF)

Date Written: September 2016

Abstract

As the Federal Reserve continues to normalize its monetary policy, this paper studies the impact of U.S. interest rates on rates in other countries. We find a modest but nontrivial pass-through from U.S. to domestic short-term interest rates on average. We show that, to a large extent, this comovement reflects synchronized business cycles. However, there is important heterogeneity across countries, and we find evidence of limited monetary autonomy in some cases. The co-movement of longer term interest rates is larger and more pervasive. We distinguish between U.S. interest rate movements that surprise markets versus those that are anticipated, and find that most countries receive greater spillovers from the former. We also distinguish between movements in the U.S. term premium and the expected path of risk-free rates, concluding that countries respond differently to these shocks. Finally, we explore the determinants of monetary autonomy and find strong evidence for the role of exchange rate flexibility, capital account openness, but also for other factors, such as dollarization of financial system liabilities, and the credibility of fiscal and monetary policy.

Keywords: Monetary policy, United States, Interest rates, Spillovers, Asset prices, Central bank autonomy, Monetary policy; monetary conditions; autonomy; global financial cycle.

JEL Classification: C13, C15, E32, E43, E47, E52, E58, F44

Suggested Citation

Caceres, Carlos and Carriere-Swallow, Yan and Demir, Ishak and Gruss, Bertrand, U.S. Monetary Policy Normalization and Global Interest Rates (September 2016). IMF Working Paper No. 16/195. Available at SSRN: https://ssrn.com/abstract=2882633

Carlos Caceres (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Yan Carriere-Swallow

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Ishak Demir

Birkbeck, University of London - Department of Economics ( email )

Malet Street
London, WC1E 7HX
United Kingdom

Bilkent University - Department of Economics ( email )

Bilkent University, Department of
Economics
Bilkent, Ankara 06800
Turkey

Bertrand Gruss

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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