To What Degree and through Which Channel Do Central Banks Other Than the Federal Reserve Cause Spillovers? 
The standard view in the literature is that the Federal Reserve is the primary source of monetary policy spillovers; only a limited amount of research studies whether or to what extent other central banks cause spillovers. If, however, other central banks also cause large spillovers, the literature may significantly understate the magnitude of the spillovers affecting the Federal Reserve. In addition, if monetary policy changes at other central banks cause large spillovers into US interest rates, US policymakers may need to take into account these direct spillovers as well as indirect “spillbacks” into the United States through the global business cycle. This paper investigates whether central banks other than the Federal Reserve cause monetary policy spillovers and through which channel they might do so. It studies the spillovers from 20 central banks, using a high-frequency identification approach that looks at the intraday movement of interest rates in source and recipient countries around monetary policy announcements in each source country.
Key Findings
- Fourteen central banks other than the Federal Reserve show evidence of causing monetary policy spillovers into the average 10-year interest rate in other developed countries.
- Federal Reserve policies explain less than one-quarter of monetary policy spillovers into 10-year interest rates, but they explain a much larger share of spillovers into short-term rates.
- In contrast to the standard view that large central banks experience “spillbacks” of their own monetary policy but not monetary policy spillovers from other countries, US (and eurozone) interest rates are affected by large spillovers.
- These results hold over windows of no more than 20 minutes before and after monetary policy events to as long as a week afterward for sovereign and corporate bond interest rates, across different interest rate measures, and when potential comovement between countries is taken into account.
- Spillovers from the Federal Reserve have broader effects, impacting emerging-market and short-term interest rates and other asset prices. A rise in US interest rates causes declines in stock prices in other developed countries, stock prices in emerging markets, gold prices, and silver prices. The policies of other central banks generally do not show significant effects on these asset prices, and no other central bank affects as wide a range of assets.
- Central banks other than the Federal Reserve cause spillovers primarily through monetary policy surprises to the long-term part of their country’s yield curve.
Implications
This paper’s results imply that the policies of central banks other than the Federal Reserve spill over primarily through the bond-pricing channel. When a developed country’s central bank lowers its interest rates, comparable bonds in other developed countries become more appealing, which can raise their prices and lower their yields. This effect is likely to be stronger for long-term bonds, because compared with prices of shorter-term bonds, prices of long-term bonds are not as pinned down by the expected path of interest rates. This also explains why changes in the longer-term part of the source country’s yield curve cause spillovers to a greater degree compared with changes in the short-term part of the yield curve. Corporate interest rates are likely to experience spillovers through these effects because they are determined largely by sovereign bond interest rates. The finding that Federal Reserve policies affect a range of asset prices and affect short-term interest rates in other countries indicates that whereas other central banks’ policies spill over through the bond-pricing channel, those of the Federal Reserve spill over through additional channels.
Abstract
Spillovers play a crucial role in driving monetary policy around the world. The literature focuses predominantly on spillovers from the Federal Reserve. Less attention has been paid to spillovers from other central banks. I measure the degree to which 20 central banks cause spillovers. I show that central banks in medium- to high-income countries cause spillovers to medium- to long-term interest rates in similar countries through a bond-pricing channel. These effects are narrower than spillovers from the Federal Reserve, which also affect emerging markets, short-term interest rates, and other assets. However, they are still pronounced. Fourteen central banks other than the Federal Reserve cause significant spillovers: the central banks of Australia, Canada, Czechia, the eurozone, Japan, Mexico, Norway, New Zealand, Poland, Romania, South Korea, Sweden, Switzerland, and the United Kingdom. Consequently, the Federal Reserve causes only one-fifth of the spillovers to 10-year interest rates, and the United States is the recipient of large spillovers. My results imply that central banks, especially the Federal Reserve, are affected by greater spillovers than is commonly believed, and that non-Fed central banks cause spillovers through a bond-pricing channel.