U.S. Monetary Policy Normalization and Global Interest Rates

By Carlos Caceres, Yan Carriere-Swallow, Ishak Demir, Bertrand Gruss

September 29, 2016

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Format: Chicago

Carlos Caceres, Yan Carriere-Swallow, Ishak Demir, and Bertrand Gruss. U.S. Monetary Policy Normalization and Global Interest Rates, (USA: International Monetary Fund, 2016) accessed November 12, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Banking, Exchange rate flexibility, Financial sector policy and analysis, Financial services, Foreign exchange, Long term interest rates, Short term interest rates, Spillovers, Yield curve

Keywords: Africa, Autonomy, Domestic interest rates, Exchange rate, Exchange rate flexibility, Gear monetary policy, Global, Global financial cycle, Interest rate differential, Interest rate hike, Interest rate interdependence, Interest rate movement, Interest rate pass-through, Interest rate path, Long term interest rates, Longer-term interest rates, Macro condition, Monetary conditions, Monetary policy, Opening interest rate differential, Short term interest rates, Spillovers, Unanticipated rate hike, WP, Yield curve

Publication Details

Pages:

46
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/195
Stock No:

WPIEA2016195
ISBN:

9781475543056
ISSN:

1018-5941

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