US-Euro Area Term Structure Spillovers, Implications for Central Banks
40 Pages Posted: 3 Feb 2017
Date Written: November 17, 2016
Spillovers between the US and euro area term structures of interest rates are examined. Implications for monetary policy are investigated using term-structure metrics that proxy conventional and unconventional instruments, i.e. the short rate, the 10 year term premium, and the 10 year risk-free rate. A new discrete-time arbitrage-free term structure model is used to extract these variables, at a daily frequency during the period covering 2005 to 2016. Relying on forecast error variance decompositions, following Diebold and Yilmaz (2009), it is found that transatlantic spillovers have increased by approximately 11%-points during the examined period, making it more difficult for central banks to directly assess the impact of their policies.
Keywords: yield curve modelling, monetary policy, international spillovers
JEL Classification: C32, E43, E58
Suggested Citation: Suggested Citation