A Chinese Slowdown and the Nominal Term Structures of the US and German Interest Rates

66 Pages Posted: 30 Jul 2018 Last revised: 16 Nov 2018

Date Written: July 29, 2018


To measure the global spillovers of a Chinese slowdown on the long-term nominal interest rates in the US/Germany, I model the US/German nominal term structure jointly in the post financial crisis (FC) sample, including the Chinese leading indicator as a new factor. I use an affine term structure model and decompose changes in the 5-year nominal interest rates into (1) changes in the expected future nominal short rate, “the signaling channel,” and (2) the 5-year term premium, “the portfolio balance channel.” A drop in the Chinese leading indicator results in a significant drop in the US/German growth over the first year. In the US, this leads to clear signaling effects but no portfolio balancing effects. In Germany, I find both signaling and portfolio balancing effects, but the direction of these effects is opposite to what one might expect. To deal with the different monetary regimes since the Sovereign debt crisis (SDC) I also model the German term structure independently from the US in the post SDC sample. Like in the US, I now find that in Germany, a lower Chinese leading indicator has important signaling effects in the expected direction. However, (opposite) portfolio balancing effects neutralize these signaling effects on the estimated 5-year Bund yield.

Keywords: Chinese slowdown, global growth, emerging market economies, affine term structure model, empirical asset pricing, international finance, Treasury yields, Bund yields

JEL Classification: G01, G12, G15, E43, E44, E52, E58, F30

Suggested Citation

Maletic, Matjaz, A Chinese Slowdown and the Nominal Term Structures of the US and German Interest Rates (July 29, 2018). 31st Australasian Finance and Banking Conference 2018, Available at SSRN: https://ssrn.com/abstract=3222271 or http://dx.doi.org/10.2139/ssrn.3222271

Matjaz Maletic (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314

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