International Spillovers of Monetary Policy: Conventional Policy vs. Quantitative Easing

49 Pages Posted: 23 Aug 2018 Last revised: 21 Feb 2019

See all articles by Stephanie E. Curcuru

Stephanie E. Curcuru

Board of Governors of the Federal Reserve System

Steven B. Kamin

Board of Governors of the Federal Reserve System

Canlin Li

Board of Governors of the Federal Reserve System

Marius Rodriguez

Board of Governors of the Federal Reserve System

Date Written: 2018-08-21

Abstract

This paper evaluates the popular view that quantitative easing exerts greater international spillovers than conventional monetary policies. We employ a novel approach to compare the international spillovers of conventional and balance sheet policies undertaken by the Federal Reserve. In principle, conventional monetary policy affects bond yields and financial conditions by affecting the expected path of short rates, while balance-sheet policy is believed act through the term premium. To distinguish the effects of these two types of policies we use a term structure model to decompose longer-term bond yields into expected short-term interest rates and term premiums. We then examine the relative effects of changes in these two components of yields on changes in exchange rates and foreign bond yields. We find that the dollar is more sensitive to expected short-term interest rates than to term premia; moreover, the rise in the sensitivity of the dollar to monetary policy announcements since the GFC owes more to an increased sensitivity of the dollar to expected interest rates than to term premiums. We also find that changes in short rates and term premiums have similar effects on foreign yields. All told, our findings contradict the popular view that quantitative easing exerts greater international spillovers than conventional monetary policies.

Keywords: Monetary policy, International spillovers, Term premium

JEL Classification: E5, F3

Suggested Citation

Curcuru, Stephanie E. and Kamin, Steven B. and Li, Canlin and Rodriguez, Marius, International Spillovers of Monetary Policy: Conventional Policy vs. Quantitative Easing (2018-08-21). FRB International Finance Discussion Paper No. 1234. Available at SSRN: https://ssrn.com/abstract=3237295 or http://dx.doi.org/10.17016/IFDP.2018.1234

Stephanie E. Curcuru (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Steven B. Kamin

Board of Governors of the Federal Reserve System ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-3339 (Phone)
202-736-5638 (Fax)

Canlin Li

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-452-2227 (Phone)

Marius Rodriguez

Board of Governors of the Federal Reserve System ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

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