Spillovers from U.S. Monetary Policy Normalization on Brazil and Mexico’s Sovereign Bond Yields

By Carlos Góes, Herman Kamil, Phil De Imus, Mercedes Garcia-Escribano, Roberto Perrelli, Shaun K. Roache, Jeremy Zook

March 10, 2017

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Carlos Góes, Herman Kamil, Phil De Imus, Mercedes Garcia-Escribano, Roberto Perrelli, Shaun K. Roache, and Jeremy Zook. Spillovers from U.S. Monetary Policy Normalization on Brazil and Mexico’s Sovereign Bond Yields, (USA: International Monetary Fund, 2017) accessed December 30, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper examines the transmission of changes in the U.S. monetary policy to localcurrency sovereign bond yields of Brazil and Mexico. Using vector error-correction models, we find that the U.S. 10-year bond yield was a key driver of long-term yields in these countries, and that Brazilian yields were more sensitive to U.S. shocks than Mexican yields during 2010–13. Remarkably, the propagation of shocks from U.S. long-term yields was amplified by changes in the policy rate in Brazil, but not in Mexico. Our counterfactual analysis suggests that yields in both countries temporarily overshot the values predicted by the model in the aftermath of the Fed’s “tapering” announcement in May 2013. This study suggests that emerging markets will need to contend with potential spillovers from shifts in monetary policy expectations in the U.S., which often lead to higher government bond interest rates and bouts of volatility.

Subject: Bond yields, Central bank policy rate, Financial institutions, Financial markets, Financial services, Securities markets, Sovereign bonds, Vector error correction models, Yield curve

Keywords: Bond yield, Bond yields, Central bank policy rate, Global, Local-currency sovereign bond bond yield, Local-currency sovereign bond yields, QE, Securities markets, Sovereign bond bond yield, Sovereign bond yield, Sovereign bonds, Tapering, Treasury, Treasury yield, Vector error correction models, WP, Yield, Yield curve, Yield shock

Publication Details

Pages:

39
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/050
Stock No:

WPIEA2017050
ISBN:

9781475586077
ISSN:

1018-5941

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