BIS Working Papers

No 757

Explaining Monetary
Spillovers: The Matrix
Reloaded
by Jonathan Kearns, Andreas Schrimpf and Fan Dora Xia

Monetary and Economic Department

November 2018

JEL classification: E44; F36, F42, F65

Keywords: Monetary Policy Spillovers; High-frequency

Data; Financial Integration
BIS Working Papers are written by members of the Monetary and Economic
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economists, and are published by the Bank. The papers are on subjects of topical
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This publication is available on the BIS website (www.bis.org).

© Bank for International Settlements 2018. All rights reserved. Brief excerpts may be
reproduced or translated provided the source is stated.

ISSN 1020-0959 (print)

ISSN 1682-7678 (online)
 Explaining Monetary Spillovers:
The Matrix Reloaded ∗

Jonathan Kearns Andreas Schrimpf Fan Dora Xia

Reserve Bank of Australia BIS & CEPR BIS

[email protected] [email protected] [email protected]

This version: 26th October 2018

∗
We are grateful to Ben Cohen, Stijn Claessens, Mathias Drehmann, Georgios Georgiades, Enisse Khar-
roubi, Hyun Song Shin, and seminar and conference participants at BIS, Reserve Bank of Australia, University
of Geneva, University of Lugano, University of Melbourne, University of Sydney, the 2017 Geneva Interna-
tional Macroeconomics and Finance Workshop and the 2018 CEBRA conference, for helpful comments and
suggestions. The views in this article are those of the authors and do not necessarily represent those of the
Bank for International Settlements (BIS) or the Reserve Bank of Australia (RBA).
 Explaining Monetary Spillovers:
The Matrix Reloaded

Abstract

Using monetary policy shocks for seven advanced economy central banks, measured at
high-frequency, we document the strength and characteristics of interest rate spillovers
to 47 advanced and emerging market economies. Our main goal is to assess different
channels through which spillovers occur and why some countries’ interest rates respond
more than others. We find that there is no evidence that spillovers relate to real linkages,
such as trade flows. There is some indication that exchange rate regimes influence
the extent of spillovers. By far the strongest determinant of interest rate spillovers
is financial openness. Countries that have stronger bilateral (and aggregate) financial
links with the US or euro area are susceptible to stronger interest rate spillovers. These
effects are much more pronounced at the longer end of the yield curve, indicating that
while countries retain policy rate independence, financial conditions are influenced by
global yields.

JEL Classification: E44; F36, F42, F65

Keywords: Monetary Policy Spillovers; High-frequency Data; Financial Integration;
 1. Introduction

It is well established that interest rates co-move across countries. The extent of this co-

movement, and the underlying drivers, are more uncertain but are important for many reas-

ons. The greater the co-movement of a country’s interest rates with foreign rates that is

unrelated to domestic conditions, the weaker the control by the central bank over domestic

financial conditions, diminishing its ability to achieve its policy objectives. Interest rate

co-movement is also an important channel through which financial shocks can propagate

internationally. In addition, co-movement may diminish the diversification opportunities

available to international investors in fixed income markets.

Concerns regarding co-movement have been particularly prominent surrounding quant-

itative easing (QE) and its reverse, as ‘quantitative tightening’ (QT) gathers momentum.

The exceptionally large expansions in major central banks’ balance sheets in the wake of

the financial crisis and thereafter depressed domestic yield curves. QE policies are also com-

monly believed to have spilled over to very easy financial conditions and low yields in other

countries, which may not have been warranted given domestic economic conditions in those

economies. However, a pertinent policy question remains over whether major central banks’

eventual balance sheet wind-down will spillover to other countries’ yield curves in a symmet-

ric manner as macroeconomic and financial conditions are very different now to when these

policies were first implemented.

While many papers have documented some co-movement of interest rates internationally,

extant work often struggles to cleanly identify whether the co-movement stems from spillovers

in a causal sense or rather from common drivers. In this paper, we improve on the existing

literature by using cleanly identified monetary policy shocks from high-frequency interest

rate changes to precisely estimate the spillovers from one country’s interest rates to others.1
1
Note that throughout this paper, we use the term ‘spillovers’ in a broad sense to encompass changes in
a country’s interest rate that are in direct response to those in another country’s interest rate.

1
We identify three components to a monetary policy shock: (i) a ‘target’ policy rate shock,

(ii) a shock to the expected ‘path’ of policy, and (iii) a ‘term premium’ shock. This setup

encompasses the wide range of information contained in central bank announcements, and

allows us to use a sample that covers both the period of ‘normal’ interest rate policies prior

to the financial crisis and the period of ‘zero’ policy rates that followed in the QE period.

Our study uses a rich set of data in the time-series and cross-sectional dimensions. Using

high-frequency data to measure the interest rate change to the originating country’s monetary

policy announcement ensures exogeneity and thus enables us to pin down the direction of

spillovers in a causal sense. We perform this analysis for monetary policy shocks originating

from seven advanced economies. We look beyond the ‘matrix’ of monetary policy spillovers

among these seven economies, to consider an even larger matrix of responses of 47 advanced

and emerging market economies. We test for spillovers for short- and long-term interest

rates. This approach provides more power for the analysis in the cross-sectional dimension,

to better shed light on the nature and extent of interest rate spillovers.

Another key feature of our work is to thoroughly test through which channels interest rate

spillovers occur. We propose three alternative channels: (i) domestic economic conditions

(including economic linkages), (ii) FX regime, and (iii) the impact of bond risk premia (and

financial factors more broadly). We use a comprehensive set of financial and economic data

for our broad panel of countries, encompassing bilateral and aggregate economic and financial

links as well as country-specific factors. With these data at hand, we explore the economic

and financial conditions that lead to stronger (or weaker) interest rate spillovers.

We find that there are strong spillovers originating from Federal Reserve monetary policy

announcements, leading to a swift repricing of fixed income markets globally. Notably, how-

ever, the Fed is not the sole originator of spillovers. We also present evidence of significant

spillovers from ECB policies, albeit to a lesser extent. However, spillovers from other ad-

vanced economy central banks, including from the Bank of Japan and the Bank of England,

2
are mild.

The spillovers we document are much more prevalent for long-term interest rates, while

short rates do not consistently respond to foreign monetary policy news. This suggests that

central banks have been able to retain a significant degree of autonomy in their interest rate

policies (consistent, e.g. with Obstfeld 2015), despite the forces of the global financial cycle.2

One may argue, however, in line with Rey (2013) that it is particularly longer-term rates

that determine financial conditions. Our results are thus consistent with the view that the

independence of central banks to determine financial conditions is limited by the presence

of spillover effects. And, somewhat surprisingly, we find that such spillover effects are larger

to advanced economies (that are well-integrated in global capital markets) than they are to

emerging markets.

We obtain a clear picture regarding the factors explaining different intensities of spillovers

across countries. There is no empirical support for a macroeconomic channel in explaining

the strength of spillovers. Neither trading linkages nor general economic openness are related

to the sensitivity of interest rates to policy shocks in other currency areas. There is partial

support for a channel related to exchange rates. In support of the bond risk premium spillover

channel, financial openness unambiguously emerges as the strongest factor in explaining the

extent of the sensitivity of a country’s interest rates to monetary policy shocks in major ad-

vanced economies. In explaining interest rate sensitivity, ‘financial openness’ is best captured

by bilateral portfolio equity flows and the amount of the country’s debt denominated in the

currency of the spillover originator country, although the results are robust to using many

alternative measures of financial openness.

The remainder of the paper is structured as follows. In Section 2 we outline the channels

through which policy in one country can spill over (in the broad sense of the word) to other
2
Miranda-Agrippino & Rey (2015) suggest U.S. monetary policy is a key driver of the global financial
cycle. See e.g. Cerutti et al. (2017) for new evidence and a sceptical view regarding the existence of a global
financial cycle, as conditions in the core do not explain a large share of global capital flows.

3
countries’ interest rates and discuss the related literature. In Section 3 we provide a roadmap

of our methodology for detecting spillovers and testing the different spillover channels. In

Section 4 we outline the detailed data we use to first identify spillovers and then to test the

channels. We then present our results on global spillovers and their main drivers in Sections 5

and 6, respectively. We then conclude.

2. Why do monetary policy spillovers occur?

2.1. Spillover channels

Yield curves can be influenced by a range of domestic and international factors.3 In most fin-

ancial systems, short-term market rates are dominated by central bank policy actions. Central

banks’ policy mandates and goals differ across countries, but most respond to macroeconomic

conditions (in particular inflation, and often unemployment or the output gap) and, for some,

exchange rate considerations matter as well. Central banks’ control over long-term rates is

usually significantly weaker under most monetary operating systems.4 Long-term govern-

ment bond yields reflect not only current and expected short-term rates, but also various risk

premia (such as term premia and in some cases, e.g. emerging markets, also credit premia).

Based on these broad macroeconomic and financial determinants of short and long interest

rates, we identify three potential channels through which spillovers can occur from interest

rates in an originator country to those in the recipient country.

(a) Domestic macroeconomic conditions. Monetary policy announcements (in the ori-

ginator country) may reveal new information on economic conditions in that country, as

suggested by Campbell et al. (2012) and Nakamura & Steinsson (2018). This may in turn

lead investors to update their expectations of macro conditions in the recipient country due
3
See Diebold et al. (2005), Gürkaynak & Wright (2012), or Dahlquist & Hasseltoft (2013) for examples.
4
A notable exception is the Bank of Japan has been implementing a target for long-term bond yields since
2016 based on flexible asset purchases, labelled ‘yield curve control’.

4
to the various economic linkages between the two economies. Such inter-linkages can result

from trade flows, or can encompass a range of business and information flows that manifest

themselves through co-movements in business cycles (see, for example, Kose et al. (2003)

and Baxter & Kouparitsas (2005)) and/or inflation dynamics (see, for example, Ciccarelli &

Mojon (2010) and Neely & Rapach (2011)).

(b) FX regime. Spillovers can occur via a foreign exchange (FX) channel if a country

pegs its exchange rate to that of a larger economy, either formally or implicitly (including

arrangements such as a managed or ‘dirty’ float). If it has an open capital account, then the

country implementing the peg will need to maintain interest rates close to those of the larger

economy in order to avoid exceptionally large capital flows (see, e.g. Shambaugh 2004).

Changes in interest rates in the larger economy will then be reflected almost mechanically

in the yield curve of the smaller economy at least through expectations of the domestic policy

interest rates, even if the recipient country’s central bank does not respond immediately. In

effect, the country pegging its exchange rate virtually ‘outsources’ its monetary policy to the

larger economy. Not only will this lead to a co-movement in short-term policy rates, but if the

peg is credible and expected to persist, interest rates at all maturities will co-move. Even some

countries with notionally flexible exchange rate regimes may want to avoid large exchange

rate adjustments against a major currency, e.g. for trade competitiveness or financial stability

reasons, and hence their policy rates may shadow that of the larger economy. Alternatively,

they may intervene in the FX market to smooth the bilateral exchange rate. Even if such

interventions are sterilized, local bond yields could still be affected through signaling and/or

portfolio re-balancing effects.

(c) Bond risk premia and financial conditions. With globally integrated capital mar-

kets, movements in term premia (and other possible risk premium components) in a large

economy can drive those in other economies. This can occur, for instance, through the port-

5
folio flows of international investors that are active in different countries’ bond markets as

they seek higher yielding assets, often described as a ‘search for yield’.5 Spillover effects can

also arise due to the presence of global intermediaries and their relevant risk constraints (see,

e.g. Bruno & Shin (2015) and Malamud & Schrimpf (2018)).

The intensity of these spillovers will depend on the degree of financial integration between

the economies. This type of spillover, in particular if it operates independently of the exchange

rate regime, also relates to the ongoing debate on the global financial cycle and the ‘dilemma

not trilemma’ conjecture of Rey (2013) and Rey (2016). We return to this issue when we

discuss the implications of our results.

2.2. Related literature

This paper relates to several branches of the literature. Various papers examine how foreign

asset prices respond to monetary policy shocks, although nearly all only consider interest

rate changes by the largest central banks, the U.S. Federal Reserve and/or ECB. Typically

extant work also considers only a relatively narrow set of recipient countries (often emerging

markets).6 A number of papers have documented interest rate spillovers to foreign bonds,

notably Gilchrist et al. (2014) and Andersen et al. (2007).7 While most papers consider

spillovers to (longer-term) bond yields, Edwards (2015) and Takáts & Vela (2014) find evid-

ence of spillovers to short-term or policy rates although Obstfeld (2015), Devereux & Yetman

(2010) and Miyajima et al. (2014) do not.8 Others have looked at interest rate spillovers in a
5
This channel also relates to the risk-taking channel of monetary policy, as coined by Adrian & Shin (2010)
and Borio & Zhu (2012). Bekaert et al. (2013) find that US monetary policy (measured via changes in policy
rates) affects variance risk premiums based on the VIX, a common gauge for the global price of risk.
6
Some papers also look at the spillovers to exchange rates or foreign equities, such as Ammer et al. (2010),
Kim & Nguyen (2009), Wongswan (2006), Wongswan (2009), and Brusa et al. (2016).
7
Other earlier contributions include Forbes & Chinn (2004), Ehrmann & Fratzscher (2003), Faust et al.
(2007), Craine & Martin (2008) and Ehrmann & Fratzscher (2009) for equity markets.
8
While most papers typically use daily (and sometimes intra-data), some others have looked at spillovers to
foreign interest rates, or other asset prices, with lower frequency VARs combining monthly or quarterly macro
data. In some cases, these papers impose a Taylor rule to attempt to separate common shocks from spillovers,
which makes strong assumptions about the suitability of the Taylor rule for identification of spillovers, see
for example Dedola et al. (2017), Han & Wei (2016), Hofmann & Takáts (2015), Fukuda et al. (2013) and
Bredin et al. (2010).

6
broader context, noting there are net economic spillovers, for example Ammer et al. (2016),

Georgiadis (2016) and Fukuda et al. (2013).

Our paper is also related to the recent literature on the international impact of QE. Many

papers have found spillovers from the Federal Reserve asset purchases, including Neely (2011),

Wright (2012), Fratzscher et al. (2017), Bauer & Neely (2014) and Rogers et al. (2015).9 In

comparison with conventional monetary policies, Curcuru et al. (2018) found that QE did not

exert greater international spillovers. Other studies have also found that other major central

banks’ QE policies also triggered spillovers; Chen et al. (2016) and Rogers et al. (2014) show

that Fed, Bank of England and ECB unconventional policies affected foreign bond yields,

although QE by the Bank of Japan did not. In contrast, Fratzscher et al. (2016) find that

unconventional policies by the ECB had negligible effects on other countries’ yields.

Some papers have gone beyond documenting international interest rate spillovers, and

attempt to explain them. Two papers have a similar objective to ours. Hausman & Wongswan

(2011) look at the effect of FOMC announcement surprises on short and long interest rates

(for 20 countries). They use a fairly small number of explanatory variables to model the cross-

section of responses, though, and study a sample period that ends before the financial crisis.10

Bowman et al. (2015) examine what variables relate to the intensity of U.S. unconventional

monetary policy spillovers to emerging market sovereign yields, but they do not consider

spillovers to advanced economies and focus on QE.11 The cross section of responsiveness is

modelled in a panel-data framework with a broad set of country-specific controls. A number

of other papers have found the intensity of spillovers to relate to various specific factors,

including Shah (2017) (the level of interest rates), MacDonald (2017) and Aizenman, Chinn

& Ito (2016) (degree of integration), Mishra et al. (2014) and Ahmed et al. (2017) (economic
9
This literature builds on studies finding that QE compressed domestic long-term yields, for the United
States see Gagnon et al. (2011), Krishnamurthy & Vissing-Jorgensen (2011) and Swanson (2016) and also
Christensen & Rudebusch (2012) for the U.S. and U.K., and Krishnamurthy et al. (2015) for the ECB.
10
The variables they consider are: trade/GDP, trade with U.S./GDP, exports to U.S./GDP, share of
equities owned by U.S., share of equity foreigners can own, total stock of bank lending form U.S./GDP,
exchange rate regime, size of equity market/GDP.
11
They find smaller spillovers for stock prices and exchange rates.

7
fundamentals for emerging market economies), Jotikasthira et al. (2015) (risk compensation)

and Ehrmann & Fratzscher (2005) (monetary union).12

Our paper improves upon this existing work by precisely identifying interest rate spillovers

from a broader set of central banks (seven major advanced economies), not just the Federal

Reserve, for both short- and long-term interest rates. A key feature of our work is to consider

the full matrix of spillovers to a plethora of advanced and emerging market economies.

This approach is sensible given the dense network structure of financial claims connecting

different economies highlighted in Shin (2017). Crucially, we then put some structure on the

transmission of spillovers by using a comprehensive dataset covering bilateral and aggregate

economic and financial linkages. The goal of these empirical tests is to assess through which

channels spillovers occur.

3. Research design: detecting and explaining spillovers

This section provides a brief summary of the main features of the research design. Our

empirical analysis of spillovers proceeds in two stages.

Detecting spillovers. First, we test which central banks’ policy actions trigger spillovers to

others, and which countries’ interest rates are most receptive. Specifically, we start with sep-

arate regressions for each originator-recipient combination of economies to compare spillovers

from shock-originating central banks to recipient economies for interest rates. The equation

we estimate is given as

∆ri,t = αij + βij0 MPSj,t + εi,j,t , (1)

12
Other studies have examined how the spillovers to equities and exchange rates in emerging markets relate
to economic fundamentals, such as Aizenman, Binici & Hutchison (2016).

8
where ∆ri,t is the change in interest rates in country i and MPSj,t is our measure of monetary

policy shocks in country j. We provide exact details on measurement in Section 4 below.

Explaining spillovers. Second, we aim to distinguish between the different spillover chan-

nels outlined above drawing on the richness of our data in the cross-section of countries. The

three channels differ in the types of macro and financial conditions affecting the strengths of

spillovers across countries. For the channel of domestic economic conditions, we expect that

spillovers should positively relate to bilateral trade flows as well as macroeconomic interlink-

ages (e.g. as proxied by correlations of the business cycle and inflation across countries). The

FX regime channel posits that, when an exchange rate is tied to that of a major currency,

volatility in the corresponding exchange rate cross will be significantly muted. Hence, one

would expect FX volatility and spillover strengths to be negatively correlated. As for the

channel of bond risk premia and financial conditions, a key prediction is that countries that

are more financially open should receive larger spillovers.

To shed light on the empirical relevance of the three channels as spillover determinants,

we run the following regression with interaction terms

∆ri,t = αj + θj0 Zt + βj0 + γj0 Xi,t−1 MPSj,t + εj,t ,

(2)

where Zt is a global control; Xi,t is a recipient-specific conditioning variable; θj measures the

sensitivity to global controls; βj is a vector that measures the unconditional spillover from
13
our three monetary policy shocks. Our main object of interest here is γj , which measures

the spillover conditional on (recipient) country-specific controls.

Our conditioning variable Xi,t either measures economic linkages, conditions governing the

FX regime of the country, or financial linkages between the originator and recipient countries’

economies. Another important dimension to differentiate our channels is the maturity of the
13
For conditional variables, some of them measure bilateral relations. In that case, they are not only
recipient-specific but also originator-specific.

9
interest rates that will be more affected by spillovers. The domestic economic channel will

be more prevalent for short rates (or expectations of future short rates embedded in long-

term rates). The FX regime channel, by contrast, will operate predominantly via short-term

interest rates, but longer-term rates might also be affected to some extent. As for the risk

premium channel, we expect mostly long-term rates to be subject to spillover effects. This

is because yields at the longer end of the yield curve are more susceptible to risk premium

fluctuations than yields at the shorter end. The latter will be driven to a larger extent

by expectations about the path of future short rates. Table 1 summarizes the different

predictions of the three spillover channels and our empirical approach to differentiate among

them.

Insert Table 1 about here

4. Data

A key feature of our work is to rely on high-frequency data on various interest rates to measure

the surprise element of monetary policy announcements. This approach ensures exogeneity of

the measured monetary policy shocks, and hence allows to pin down the direction of spillovers

in a causal sense.

High-frequency monetary policy shocks. We construct monetary policy shocks from

interest rate changes in a narrow window around monetary policy announcements. These

include both scheduled monetary policy events such as the release of information on the

outcomes of policy meetings, as well as non-scheduled events (e.g. key speeches or press

releases) that reveal news about unconventional policies such as asset purchases or forward

guidance.14 We summarize the monetary policy shock from country j at time t by a three-

dimensional vector to capture the different components of news included in the central bank
14
See Ferrari et al. (2017) for a more detailed description of the dataset of monetary policy events.

10
announcement

 
˜ 1m OIS
∆r
 j,t 
 
MPSj,t = ˜ 2y ⊥ ∆r
 ∆r ˜ 1m OIS , (3)
j,t j,t 
 
˜ 10y ⊥ ∆r
∆r ˜ 2y
j,t j,t

˜ represents the change in the interest rate in a narrow window of +/- 20-minutes
where ∆r

around the announcement

˜ t = rt+5min→t+20min − rt−20min→t−5min .
∆r

Note that we use a 15-minute average before and after the event to reduce any noise in

quoted interest rates. When computing the level shift in average interest rates before and

after the event, we omit five minutes just before and after to account for the time the market

takes to process the news and to be robust against any potential misalignment of time-

stamps.15 Our source of (1-minute) high-frequency data for the computation of monetary

policy surprises by these seven central banks is Thomson Reuters TickHistory.

The first component of the monetary policy shock vector given in Equation (3) is the

change in the interest rate on 1-month Overnight Indexed Swaps (OIS).16 We refer to this

as the ‘target’ shock as it captures the repricing of market expectations of the short-term

policy rate target. The second component is the change in the 2-year government bond yield

that is orthogonal to the change in 1-month OIS rates. We refer to this as the ‘path’ shock,

as it largely reflects revisions in investor expectations of the expected path of policy rates in
15
For ECB monetary policy shocks, we make use of German government bond yields which are the common
benchmark rates in the euro area. Moreover, we use a larger window of one hour in order to also cover market
reactions to the ECB’s press conference.
16
OIS contracts are OTC derivatives contracts allowing investors to hedge against (or speculate on) move-
ments the average level of the overnight rate over the maturity of the contract. Unlike futures contracts
which refer to the overnight rate in a particular calender month, the maturity in the OIS contract is fixed.
Hence they allow investors to more finely calibrate their hedges. OIS contracts are widely traded in a broad
array of currencies.

11
the future. These two components originally proposed by Gürkaynak et al. (2005) have been

commonly used in the literature.17

To broaden the channels through which monetary policy can have an impact, and in order

to accommodate episodes of unconventional policies, we expand the monetary policy shock

vector by a third component—a risk premium shock. We measure this shock as the change

in the 10-year government bond yield that is orthogonal to the change in 2-year yields. This

component is intended to capture the impact on risk premia induced by news about monetary

policy, in particular for asset purchase programs which have been found to operate to a large

extent via their impact on term premia. Gilchrist et al. (2014) adopted a similar measure to

asses the impact of U.S. unconventional monetary policy.18

Insert Table 2 about here

We consider monetary policy shocks from seven advanced economy central banks: Federal

Reserve, European Central Bank, Bank of Japan, Bank of England, Bank of Canada, Reserve

Bank of Australia, Swiss National Bank. An overview of the different central banks’ monetary

policy events is given in Table 2. It provides a summary of basic statistics for the shocks,

including mean, standard deviation, time span and number of observations of these shocks.

Target shocks close to zero on average for all the seven central banks, which ensures that our

sample is not biased towards monetary policy easing or tightening regimes. The average for

both path and premium shocks is zero by construction. Standard deviations for the three

shocks are more or less of similar magnitudes, suggesting the necessity of including all these

components to measure the monetary policy shock.

Insert Figure 1 about here

17
In fact, Gürkaynak et al. (2005) find that most of the explanatory power of monetary policy news for
U.S. Treasury yields comes from their ‘path’ factor derived from short-rates and interest rate futures.
18
Also see Swanson & Williams (2014) for an approach that is similar in spirit than ours.

12
 The time-series of Fed monetary policy shocks, depicted in Figure 1, demonstrates the

different phases of U.S. monetary policy over our sample period. Fed target shocks were

close to zero after 2009 as the Fed funds rate had been constrained by the effective lower

bound (ELB). Path shocks were also much smaller after this date with the market mostly

confident that ultra-low interest rates would persist. Risk premium shocks, by contrast, did

not decline in magnitude. Key policy announcements also stand out for their large measured

shocks. When the Fed revealed news on the first round of large-scale asset purchases in

March 2009, the risk premium shock registered its most negative reading in the sample. The

Fed’s explicit forward guidance on maintaining policy rates low for long in August 2011 was

captured by a large negative path shock. Shocks from other central banks, plotted in Figure

IA..1 in the Online Appendix, similarly characterize the various phases of monetary policy

as policy rates dipped to historical lows and some central banks resorted to asset purchase

programs.

Gauging spillovers to recipient countries. In this paper, we use a broad panel of 27

advanced and 20 emerging market economies as potential recipients of spillovers. The wide

cross-section delivers more power to shed light on the different channels outlined above.19

Each recipient country’s interest rate change is computed as the daily change from the closing

yields preceding the monetary policy announcement to the subsequent daily closing yield

(which will be after the policy announcement). These changes are calculated with careful

adjustment of time-zone difference and daylight saving time conventions. Our daily interest

rate data are taken from Bloomberg.

Note that, while the three monetary policy shock variables are constructed from the

high-frequency data to precisely pin down monetary policy shocks, we opt for measuring the

response with daily data for two reasons: first, as it allows us to use a much broader panel of
19
Table IA.1 in the supplementary Online Appendix presents an overview of the spillover originator and
recipient countries in our sample.

13
countries (including EMEs), and second as it mitigates issues due to any time-zone difference,

which mean that some markets are closed (or less active) when our originator central banks

unveil their policy decisions.

Conditioning variables. We consider a broad range of macro and financial variables to

explain cross-country differences in the strength of spillovers. Our tests of the domestic

economic conditions channel rely on bilateral and aggregate imports, exports and variables

commonly used in the trade literature explaining the volume of trade between countries. We

also constructed measures of growth and inflation correlations from realized GDP and CPI to

represent more amorphous economic links between countries. To gauge the impact of the FX

regime for spillover effects, we compute a measure of realized FX volatility from squared daily

changes of spot exchange rates (see, e.g. De Grauwe & Schnabl 2008, for a smilar approach

to construct de facto measures of FX regimes). To asses the bond risk premium channel,

we rely on proxies of financial openness. We consider both the overall financial openness

of recipient countries and the bilateral financial openness between recipient countries and

originator countries. We make use of a wide range of data to gauge financial openness,

including bilateral and aggregate FDI, portfolio investments, and bank loans, as well as

the currency of composition of foreign debt. Details on variable definitions and sources are

provided in Table IA.2 in the Online Appendix.

5. Does monetary policy spill over to other countries?

We start with Equation (1) to test whether monetary policy shocks originating from the seven

advanced economies spill over to the recipient countries under consideration. To measure the

interest rate response, we consider rates of different maturities: 1-month and 6-month interest

rates, and 2-year and 10-year government bond yields.20 We define that a spillover from an
20
Depending on data availability, for 1-month or 6-month interest rates, we used OIS rates, government
bill rates, interbank rates or deposit rates. Please see the Appendix for details.

14
originator central bank j to a recipient country i is significant if the p-value from the F -test

of joint significance of βbij for the three monetary policy shocks coefficients is less than 10%.

Insert Figure 2 about here

Insert Figure 3 about here

Figures 2 and 3 show the fraction of countries whose interest rates are significantly affected

by the policy shocks originating from our seven major advanced economy central banks for

short-term and long-term rates, respectively. To simplify the exposition, we show the strength

of spillovers to recipient countries grouped by world regions and split into advanced economies

and emerging market economies.

Spillovers to short-term interest rates. A first key finding is that there are hardly

any meaningful spillover effects to rates at the short-end of the yield curve. Spillovers to

one- and six-month interest rates, Figure 2, display quite a bit of noise. While some of the

estimated effects are intuitive, e.g. the ECB has the greatest spillover to emerging market

Europe, others are not.21 What is clear is that no central bank triggers widespread short-rate

spillovers; for one-month rates not even the Fed generates statistically significant spillovers

to more than 20% of countries in any given region. Furthermore, the pattern of measured

spillovers to six-month interest rates bears little resemblance to those to one-month rates.

Overall, for short-term interest rates it is difficult to distinguish any economically significant

spillovers from noise.

Spillovers to long-term interest rates. The spillover matrices for bond yields show

much clearer, and economically meaningful, patterns, as depicted in Figure 3. These are

even clearer for 10-year yields than they are for the 2-year yields. There are more significant
21
For instance, many short rates in Latin America respond to RBA announcements as they do to Fed
announcements.

15
spillovers from monetary policy shocks originating from the Fed and the ECB. For most

regions well over half of countries’ 10-year yields have a significant response to Fed monetary

policy news. Interestingly, there are significant spillovers from the ECB to three-quarters of

advanced economies outside of Europe, but there are no significant spillovers to emerging

market economies, including those in Europe.

It is also notable that there are also significant spillovers to the non-European advanced

economies from the Bank of Japan and even the other four central banks for which we

measure monetary spillovers (Reserve Bank of Australia, Bank of Canada, Bank of England

and Swiss National Bank). In contrast, these central banks have little consistent impact on

emerging market economies. A potential reason for the smaller spillovers from the ECB,

Bank of Japan and Bank of England could be the smaller use of their currencies in trade

invoicing, as argued by Zhang (2018).

Given that spillovers are much stronger and more consistent originating from the Fed and

ECB, and to longer-term government bond yields, we focus on these in our following deeper

analysis of spillover channels. Moreover, the observation that spillovers are more prevalent for

long-term rates than short-term rates suggests a relatively minor role of the channel operating

via domestic economic conditions, as this channel is likely to present through spillovers of

short rates. That said, we explore the validity of this channel in more depth in Section 6

based on observable proxies.

Panel regressions. We move from our originator-recipient specific regressions and adopt a

panel regression specification to understand the drivers of spillovers to long-term rates.22 The

panel regression restricts the unconditional spillover strength to be the same across different

countries. We first present the baseline regression with only using monetary policy shocks as

regressors (top half of Table 3).

22
Given that strong and consistent spillovers only emerge from shocks originating from the Fed and ECB
to long-term interest rates in recipient countries, all panel regressions focus on shocks from the Fed and ECB.
And data sample spans from 2004 to 2015 for the Fed shocks, and from 2006 to 2015 for the ECB shocks.

16
 Insert Table 3 about here

The estimated coefficients and panel-corrected standard errors corroborate the existence

of significant monetary spillover effects from both the Fed and ECB. The coefficients on

monetary policy shocks are all significant, with the exception of the target shock from the

ECB. We also add two global controls to the regression – the daily change in 10-year U.S.

Treasury yields and the VIX.23 Both variables are significant for the Fed and ECB regressions.

These global factors are intended to capture other drivers independent of monetary policy

shocks that would drive co-movements of interest rates globally. Yet, also after controlling

for these global factors, most monetary policy shocks remain significant. An exception is the

risk premium shock from the ECB which loses its significance once the global controls are

added to the regression. This specification including the two global variables serves as our

baseline regression for the following analysis on the determinants of spillovers.

These effects are not only statistically, but also economically significant. Our results

suggest that a 100 basis point ‘target’ shock from the Fed on (average) translates into around

a 30 basis points change in 10-year government bond yields globally. At 38 bps, Fed induced

bond risk premium shocks have the largest global effects, whereas path shocks still account

for a sizable 27 basis point spillover effect. The pass-through is smaller for ECB shocks (also

estimated with less statistical confidence), yet ECB shocks still account for an economically

sizable 20 basis points global spillover effect on average.

6. What determines the strength of spillovers?

The primary goal of this section is to shed light on the different channels by examining which

macro and financial variables determine the strength of spillover effects under the specification
23
The daily change in the 10-year US Treasury yield controls for any spillovers to global yields outside of our
event window. For regressions with the shocks originating from the Fed, the daily change is orthogonalized
relative to the shocks to avoid collinearity.

17
of Equation (2). The empirical results are reported in Tables 4 - 8. Our interpretation of

the results presented below closely adheres to the framework of the three channels outlined

above.

Domestic economic conditions. To test the domestic economic conditions channel, we

interact monetary policy shocks with measures of economic linkages across countries. The

main prediction of the domestic economic conditions channel is that countries with tighter

economic linkages with shock originator countries should receive stronger spillovers. We first

use trade variables to capture the direct economic linkages between countries. The trade-

related variables we use are: bilateral export openness (exports from the recipient country

to the originator country relative to GDP), bilateral import openness, as well as variables

typically used in the trade gravity equation literature such as common language, weighted

distance and time difference.

Insert Table 4 about here

The results are presented in Table 4, pointing to a very limited explanatory power of the

domestic economic conditions channel in determining spillover strength. Among all specific-

ations, only the coefficient in front of the interaction term of bilateral trade with the ECB

path shock is statistically significant. That said, this effect is no longer significant when

removing euro area countries from the set of recipient countries, suggesting that among euro

area countries trade openness may be a proxy for other factors. These results do not indic-

ate there is a measurable role of the domestic economic conditions channel in determining

spillovers.

Insert Table 5 about here

However, trade is only a small portion of the economic linkages between countries which

also include the actions of multi-national companies, information and investment flows and

18
common global demand shocks. Hence, we also consider a measure of broader economic link-

ages, by looking at the commonality in macroeconomic conditions across countries. For this

purpose we use long-term realized correlations in growth and inflation, without specifying the

detailed mechanism underlying the correlation. Results using these measures as interaction

terms are presented in Table 5.24 None of the macro commonality measures robustly shows

up as significant when interacted with monetary policy shocks, however, further putting the

validity of the domestic economic conditions channel in doubt.

FX regime channel. To test the FX regime channel, we interact monetary policy shocks

with measures of FX regimes in our panel regression framework. The FX channel predicts

that countries ‘pegging’ their currencies to those of the shock originator should experience

stronger spillovers. Rather than rely on ‘de jure’ measures of FX regimes, we construct de

facto measures as in De Grauwe & Schnabl (2008), which essentially boils down to the realized

bilateral exchange rate volatility between the originator and recipient economies.25

Table 6 about here

The results reported in Table 6 indicate that the FX channel yields greater power than

the domestic economic conditions channel in explaining variation in spillover strength across

countries. In the case of ECB shocks, the coefficient in front of the interaction term of the

FX regime measure and the path shock is negative and significant. The more dampened FX

volatility is, e.g. due to an explicit or implicit currency peg, the larger the spillover of interest

rate shocks. FX volatility remains a robust variable in explaining cross-country differences

in spillover strengths also when removing the euro area from the set of recipient countries.

In the case of Fed policy shocks, the coefficient in front of the interaction term of our FX

regime measure and the risk premium shock is marginally significant. Overall, these results
24
We estimate the commonality in countries’ business cycle and inflation with a 20-quarter rolling regres-
sions. The results are robust to sensible variations of this setup.
25
FX volatility is calculated from the bilateral exchange rate between the originator and recipient countries.

19
suggest that spillover strengths are to some extent related to FX regimes, consistent with

recent findings in Han & Wei (2016).

Risk premium channel. To assess the validity of the risk premium channel, we interact

monetary policy shocks with measures of financial openness. The main idea is that the more

financially open and interconnected an economy, the larger the impact of fluctuations in

global risk appetite and financial conditions on bond yields. We explore a range of financial

openness measures, including bilateral capital flows and the overall level of cross-boarder

investments. Specifically, the bilateral variables used are: foreign currency debt denominated

in the currency of the originator country (i.e. either in US Dollars or euro), and portfolio debt,

portfolio equity, loans and FDI (all bilateral between the originator and recipient countries,

assets and liabilities separately). We also use aggregate measures of financial openness:

debt assets, portfolio assets, FDI assets and financial derivative assets (and separately, the
26
equivalent liability measures) as well as the Chinn-Ito measure of financial openness. Most

of these variables are statistically significant in explaining the strengths of spillovers from the

Fed and ECB.27

Given the correlation between these measures and to avoid any ensuing multi-collinearity

issues, we run separate regressions with each pair of these measures, checking which vari-

ables do not lose significance after controlling for other measures. This exercise helps us to

determine which proxies are most powerful in capturing financial openness and in explain-

ing spillover strengths. As can be gleaned from Table (7), two measures stand out, foreign

currency debt and portfolio equity from originator countries.28

26
Ideally, we would like to have each country’s fixed income holdings in different currencies as a financial
openness measure given its important role in portfolio choices of global fixed income investors. Unfortunately,
such granular data does not exist for all countries we considered.
27
Comprehensive results are provided in Table IA.3 - IA.6 in the supplementary Online Appendix.
28
It is possible that recipient countries experiencing strong spillovers may take measures tightening financial
openness to tame spillovers. This would result in negative relation between spillover strength and financial
openness. The potential downward bias would actually make our evidence supporting risk premium channel
stronger.

20
 Insert Table 7 about here

Our finding on the importance of financial openness in explaining spillovers is consistent

with Rey (2013), as it points to important spillovers of major central banks’ monetary policies

to other countries’ long-term rates and hence an impact on local financial conditions, regard-

less of whether the capital account is managed or not. To better differentiate between the

risk premium and FX channel, we test whether FX regime and financial openness conditions

present different channels. To this end, we include both FX volatility and our two financial

openness measures as conditioning variables. Table 8 shows that FX volatility retains its

significance in explaining cross-sectional variation in spillover strengths despite the addition

of our financial openness measures (8). This result suggests that the FX regime represents

a distinct and relevant channel, at least for explaining spillovers from ECB monetary policy

shocks.

Insert Table 8 about here

7. Conclusion

While it’s well established that interest rates co-move across countries, less is known about the

economic and financial forces behind this co-movement. Using precisely identified monetary

policy shocks for seven advanced economy central banks, we accurately document the extent

of interest rate spillovers to 47 advanced and emerging market economies. The use of high

frequency data is important as it enables us to identify spillovers in a causal sense. While

the spillovers from the policy interest rates of the Fed, and even ECB, to other countries’

long-term bond yields come less of a surprise, we demonstrate that their monetary policies

do not consistently spill over to other countries’ short-term interest rates. We also show that

spillovers from other major central banks, including the Bank of Japan and Bank of England,

are mild at best. Further, in contrast to much of the literature which has focused on spillovers

21
to emerging market economies, we show that the spillovers are actually significantly larger

to advanced economies.

To put some structure on why these spillovers occur and some countries’ interest rates are

more responsive than others we test three possible channels. We study the role of domestic

economic conditions, FX regime and bond risk premia (and financial conditions). Using

a rich set of bilateral and aggregate economic and financial data, we find that there is no

evidence that interest rate spillovers relate to economic linkages across countries. There is

some indication that exchange rate regimes influence the extent of spillovers, but by far the

strongest determinant of interest rate spillovers is financial openness. Countries that have

stronger bilateral (and aggregate) financial links with the US or euro area are susceptible to

stronger interest rate spillovers. These effects are much more pronounced at the longer end of

the yield curve. While this result is robust across a range of indicators of financial openness,

two variables stand out for best representing the financial integration that influences spillover

intensity: foreign currency debt denominated in US dollars or euros, and bilateral portfolio

equity flows from the US or euro area.

22
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Figures and Tables

28
 Path shock (bp) Target shock (bp)

0
5
10

-5

-35
-30
-25
-20
-15
-10
0
5
10
15

-5

-25
-20
-15
-10
2007 2007

2008 2008

2009 2009

2010 2010

29
2011 2011

(b) Path
(a) Target
2012 2012

2013 2013
Figure 1: Fed Monetary Policy Shocks

2014 2014

2015 2015
 20

10

0
Premium shock (bp)

-10

-20

-30

-40
2007

2008

2009

2010

2011

2012

2013

2014

2015

(c) Premium

Notes: The figure depicts monetary policy shocks by the Federal Reserve, computed based on the repricing
of various interest rates on the release of monetary policy news. The upper subfigure show target shocks as
estimated via the change in 1-month OIS rates in a (+/-) 20 minute window around Fed monetary policy
announcements. The second sub-figure shows path shocks as the change in 2-year US Treasury bond yields
orthogonalized against the change in 1-month OIS rates. The third sub-figure shows premium shocks as the
change in 10-year US Treasury bond yields orthogonalized against the change in 2-year bond yields. The
sample ranges from 2004 to 2015.

30
 Figure 2: Global Spillover Matrix for Short Rates

0.8

0.6

0.4

0.2

AE-Euro area
AE-other Fed
EME-Asia ECB
EME-Europe BoJ
BoC
EME-Latam BoE
EME-other RBA
SNB

(a) 1-month

0.8

0.6

0.4

0.2

AE-Euro area
AE-other Fed
EME-Asia ECB
EME-Europe BoJ
BoC
EME-Latam BoE
EME-other RBA
SNB

(b) 6-month

Notes: The figure plots the fraction of countries in each world region receiving a significant spillover from
monetary policy shocks originating from seven major central banks (summarising the regression results of
Equation (1) for 47 recipient countries). The originator central banks are the Federal Reserve Bank (Fed),
European Central Bank (ECB), Bank of Japan (BoJ), Bank of Canada (BoC), Bank of England (BoE),
Reserve Bank of Australia (RBA), and Swiss National Bank (SNB). The data sample spans from 2011 to
2015. Panel (a) and (b) refer to spillovers to 1-month and 6-month interest rates, respectively. A spillover is
counted as significant if the p-value from the F -test of joint significance of βbij coefficients in Equation (1) is
less than 10%.
31
 Figure 3: Global Spillover Matrix for Bond Yields

0.8

0.6

0.4

0.2

AE-Euro area
AE-other Fed
EME-Asia ECB
EME-Europe BoJ
BoC
EME-Latam BoE
EME-other RBA
SNB

(a) 2-year

0.8

0.6

0.4

0.2

AE-Euro area
AE-other Fed
EME-Asia ECB
EME-Europe BoJ
BoC
EME-Latam BoE
EME-other RBA
SNB

(b) 10-year

Notes: The figure plots the fraction of countries in each world region receiving a significant spillover from
monetary policy shocks originating from seven major central banks (summarising the regression results of
Equation (1) for 47 recipient countries). See notes to Figure 2 for more details. Panel (a) and (b) refer to
spillovers to 2-year and 10-year government bond yields, respectively. A spillover is counted as significant if
the p-value from the F -test of joint significance of βbij coefficients in Equation (1) is less than 10%.

32
 Table 1: Distinguishing Spillover Channels

Channel Maturity of Affected Macro-financial

Interest Rates Conditioning Variables

(a) Domestic Economic Mainly Short Trade (+); Commonality in

Conditions Growth and Inflation (+)

(b) FX Regime Both Short and Long FX Volatility (–)

(c) Bond Risk Premia and Long Financial Openness (+)

Financial Conditions

Notes: The table summarizes testable implications of the three spillover channels along two key dimensions:
(i) maturity of the affected interest rates, and (ii) macroeconomic or financial conditioning variables determ-
ining whether spillovers might be stronger or weaker. The (+)/(–) sign in parentheses indicates whether the
expected relationship between the conditioning variables and spillover strength is positive/negative.

33
 Table 2: Summary Statistics of Monetary Policy Shocks

Mean (bps) Std. (bps) Sample #

Target Path Premium Target Path Premium Start End

Fed -0.39 0 0 2.5 4.1 4.3 2004/07/01 2015/10/28 144

ECB -0.09 0 0 2.8 3.1 2.1 2006/05/04 2015/11/12 143
BoJ 0.00 0 0 0.6 0.2 0.5 2009/12/18 2015/12/24 73
BoE -0.19 0 0 6.1 2.5 1.6 2007/09/06 2015/11/05 202
BoC -0.04 0 0 5.0 4.8 1.3 2007/07/10 2015/12/02 62
RBA 0.25 0 0 5.8 4.0 1.4 2006/07/05 2015/12/14 149
SNB 0.11 0 0 0.8 1.7 0.7 2010/12/21 2015/09/17 21

Notes: The table provides basic summary statistics of the monetary policy shocks used in our spillover
analysis. Target, path and premium shocks are computed as given by Equation (3). The originator central
banks are the Federal Reserve Bank (Fed), European Central Bank (ECB), Bank of Japan (BoJ), Bank of
Canada (BoC), Bank of England (BoE), Reserve Bank of Australia (RBA), and Swiss National Bank (SNB).
Besides basic statistics on the mean and the standard deviation of the shocks, the sample period and number
of events in the sample is reported for each central bank.

34
 Table 3: The Baseline Spillover Regression

Target Path Premium 10y UST VIX R2

ECB -0.12 0.32 0.32 1.5%

(-1.29) (4.03) (2.61)
Fed 0.32 0.28 0.36 2.8%
(2.24) (3.44) (4.67)

ECB -0.09 0.24 0.16 0.18 0.07 2.4%

(-1.00) (3.06) 1.29 (4.26) (2.23)
Fed 0.32 0.27 0.38 0.30 0.10 5.5%
(2.57) (3.73) (5.50) (6.73) (2.83)

Notes: The table reports the results of panel regressions as given by Equation (2) which in turn serve as
baseline specification for our analysis. The dependent variable is the daily change in 10-year bond yields
in our set of 47 recipient countries. As regressors, besides the monetary shocks for the ECB and the Fed,
some specifications also consider the daily change in the US Treasury yield and the VIX as global controls.
The reported coefficients correspond to βbj and θbj in Equation (2). t-stat from Panel-Corrected Standard
Errors (PCSE) are given in parentheses. Cells coloured red (green) indicate statistically significant positive
(negative) coefficients at a 10% confidence level.

35
 Table 4: Spillovers and Bilateral Trade Linkages

Target Path Premium R2

Exports ECB 0.01 0.10 0.03 2.5%

(0.21) (2.73) (0.68)
ECB (excl. EA) -0.01 0.01 -0.01 3.0%
(-0.12) (0.15) (-0.27)
Fed 0.04 0.01 -0.01 5.0%
(0.47) (0.22) (-0.15)

Imports ECB -0.03 0.08 0.00 2.4%

(-0.74) (2.47) (-0.02)
ECB (excl. EA) -0.01 0.02 -0.02 3.0%
(-0.29) (0.49) (-0.31)

Fed 0.01 0.01 0.00 5.0%

(0.20) (0.52) (0.02)

Common Language Fed 0.08 0.05 -0.09 5.5%

(0.59) (0.60) (-1.18)

Weighted Distance Fed 0.00 0.00 0.00 5.5%

(-0.50) (0.55) (0.09)

Time Difference Fed -0.03 -0.02 -0.02 5.5%

(-0.74) (-1.02) (-0.83)

Notes: The table reports the results of panel regressions as given by Equation (2) with various recipient-
specific conditional variables Xi,t−1 measuring bilateral trade linkages and other controls. The dependent
variable is the daily change in 10-year bond yields in our set of 47 recipient countries. As regressors, besides
the monetary shocks for the ECB and the Fed, some specifications also consider the daily change in the US
Treasury yield and the VIX as global controls. The reported coefficients correspond to γ bj in Equation (2).
t-stat from Panel-Corrected Standard Errors (PCSE) are given in parentheses. Cells coloured red (green)
indicate statistically significant positive (negative) coefficients at a 10% confidence level. Exports and imports
(% of GDP) are measured in standard deviations from the mean.

36
 Table 5: Spillovers and Commonality in Macro Conditions

Target Path Premium R2

Inflation Correlation ECB 0.25 0.32 0.51 2.6%

(0.90) (1.35) (1.12)
ECB (excl. EA) 0.47 -0.29 0.53 3.4%
(1.07) (-0.77) (0.87)
Fed -0.05 -0.39 0.20 5.9%
(-0.12) (-1.70) (0.81)

Growth Correlation ECB -0.16 0.44 0.34 3.0%

(-0.86) (2.68) (1.00)
ECB (excl. EA) -0.04 0.18 0.39 5.4%
(-0.19) (1.06) (0.98)
Fed 0.02 0.28 0.50 5.5%
(0.05) (1.00) (1.68)

Notes: The table reports the results of panel regressions as given by Equation (2) with various recipient-
specific conditional variable Xi,t−1 measuring common macroeconomic conditions. The dependent variable
is the daily change in 10-year bond yields in our set of 47 recipient countries. As regressors, besides the
monetary shocks for the ECB and the Fed, specifications also include the daily change in the US Treasury
yield and the VIX as global controls. The reported coefficients correspond to γ bj in Equation (2). t-stat
from Panel-Corrected Standard Errors (PCSE) are given in parentheses. Cells coloured red (green) indicate
statistically significant positive (negative) coefficients at a 10% confidence level. Inflation correlation and
growth correlation are measured as 20-year rolling correlation of realized CPI inflation and realized real GDP
growth, respectively.

37
 Table 6: Spillovers and the FX channel

Target Path Premium R2

FX Vol. ECB 0.24 -0.49 -0.29 2.9%

(1.27) (-2.82) (-0.96)
ECB (excl. EA) -0.25 -0.48 -0.78 3.9%
(-1.18) (-2.01) (-1.87)
Fed 0.02 0.24 -0.22 5.6%
(0.04) (0.86) (-1.61)

Notes: The table reports the results of panel regressions as given by Equation (2) with the recipient-specific
conditional variable Xi,t−1 measuring FX volatility with respect to shock originating countries. The depend-
ent variable is the daily change in 10-year bond yields in our set of 47 recipient countries. As regressors,
besides the monetary shocks for the ECB and the Fed, specifications also include the daily change in the US
Treasury yield and the VIX as global controls. The reported coefficients correspond to γ bj in Equation (2).
t-stat from Panel-Corrected Standard Errors (PCSE) are given in parentheses. Cells coloured red (green)
indicate statistically significant positive (negative) coefficients at a 10% confidence level. FX volatility is
measured as a 1-year rolling realized volatility estimate, based on squared daily spot FX changes (%).

38
 Table 7: Spillovers and Financial Interconnectedness

FX debt Debt Equity Equity Portfolio Portfolio FDI FDI

(from) (from) (to) assets liab. assets liab.

FX debt N/A yes yes yes yes yes yes yes

Debt (from) no N/A yes yes yes yes yes yes
Equity (from) yes yes N/A yes yes yes yes yes
Equity (to) no no no N/A no no no no
Portfolio assets yes yes no yes N/A yes yes yes
Portfolio liab. yes no no yes no N/A no no
FDI assets yes yes no yes no no N/A no
FDI liab. yes no no yes yes no no N/A
39

Notes: The table reports the results of regressions based on various financial openness indicators. It shows whether the row vari-
able remains significant (t-stat > 1.69 ) after controlling for the column variable when both of them are included simultaneously
in panel regression Equation 2. Two variables, FX debt and Equity investment from the originator economy remain significant
even when included with all other controls.
 Table 8: Distinguishing FX and Financial Channels

Foreign currency debt Portfolio equity from originator FX vol

Target Path Premium Target Path Premium Target Path Premium

ECB 0.06 0.06 0.14 0.08 0.09 0.07 0.25 -0.39 -0.28
(1.41) (1.72) (2.42) (1.20) (1.76) (1.54) (1.10) (-1.92) (-0.86)
ECB (excl.
-0.05 0.07 0.00 0.08 0.04 0.16 -0.44 -0.33 -0.92
EA)
(-1.36) (1.89) (0.06) (1.34) (0.84) (1.46) (-1.82) (-1.23) (-1.91)
Fed 0.16 0.13 -0.06 -0.03 -0.07 0.15 0.20 0.36 -0.18
(1.77) (2.57) (-1.80) (-0.38) (-1.20) (2.25) (0.29) (1.10) (-1.06)

Notes: The table reports the results of panel regression Equation 2 with recipient-specific conditional variable Xi,t−1 including
foreign currency debt, portfolio equity from shock originating countries and FX volatility with respect to currencies in shock
40

originating countries. The dependent variable is the daily change in 10-year bond yields in our set of 47 recipient countries. As
regressors, besides the monetary shocks for the ECB and the Fed, specifications also include the daily change in the US Treasury
yield and the VIX as global controls. The reported coefficients correspond to γbj in Equation (2). t-stat from Panel-Corrected
Standard Errors (PCSE) are given in parentheses. Cells coloured red (green) indicate statistically significant positive (negative)
coefficients at a 10% confidence level.
 Internet Appendix for

Explaining Monetary Spillovers:

The Matrix Reloaded
(not for publication)

IA – 1
IA..1. Data overview

Table IA.1: List of recipient countries

Advanced (27) Emerging market (20)

Euro area Other Asia Europe Latin America Other

Austria Australia China Poland Brazil Nigeria

Belgium Canada India Romania Chile Pakistan
Finland Czech Republic Indonesia Turkey Colombia Russia
France Denmark Malaysia Mexico South Africa
Germany Hong Kong Philippines Peru
Greece Israel Thailand Venezuela
Ireland Japan Vietnam
Italy Korea
Netherlands New Zealand
Portugal Norway
Spain Singapore
Sweden
Switzerland
Taiwan
United Kingdom
United States

IA – 2
 Table IA.2: Data sources

Variable Description Source

Interest rates
1m & 6m OIS Overnight indexed swaps Bloomberg & Reuters TickHistoy
2y & 10y bond yields Sovereign bond yields Bloomberg & Reuters TickHistory
Global controls
U.S. 10y yield Sovereign benchmark bond yields
VIX S&P 500 volatility index Bloomberg
IA – 3

Economic conditions
Real GDP Year-ended growth BIS, OECD, IMF-WEO
CPI Inflation Annual rate BIS, IMF-IFS
Bilateral Trade Imports and Exports of Goods and IMF Direction of Trade Statistics
Services between Originator and
Recipient Country; Ratio to GDP
Common Language Dummy equals one if Originator and Mayer and Zignago (2011)
Recipient Share a Common
Language
Weighted Distance Distance between Originator and Mayer and Zignago (2011)
Recipient
Time Difference Time Difference between Originator Mayer and Zignago (2011)
and Recipient
 Data sources (cont.)

Variable Description Source

Financial Openness
Portfolio Equity Stock of Recipient Country (Total Lane and Milessi Ferretti (2017)
Assets or Liabilities) as a Ratio to
GDP
Portfolio Debt Stock of Recipient Country (Total Lane and Milessi Ferretti (2017)
Assets or Liabilities) as a Ratio to
GDP
FDI Stock of Recipient Country (Total Lane and Milessi Ferretti (2017)
Assets or Liabilities) as a Ratio to
IA – 4

GDP
Financial Derivatives Stock of Recipient Country (Total Lane and Milessi Ferretti (2017)
Assets or Liabilities) as a Ratio to
GDP
Bilateral Financial Openness
Foreign Currency Debt Country Debt Denominated in USD BIS
or EUR as a Ratio to GDP
Portfolio Equity Ratio to Recipient Country GDP Coordinated Portfolio Investment
Survey (CPIS), IMF
Portfolio Debt Ratio to Recipient Country GDP Coordinated Portfolio Investment
Survey (CPIS), IMF
FDI Ratio to Recipient Country GDP United Nations Conference on Trade
and Development (UNCTAD)
Bank Loans Ratio to Recipient Country GDP BIS IBFS
Supplementary Tables and Figures

IA – 5
 Path shock (bp) Target shock (bp)

0
2
4
6
8
10

-8
-6
-4
-2

-10
0
5
10
15

-5

-25
-20
-15
-10
2006 2006
2007 2007

2008 2008

2009 2009

2010 2010

2011 2011

IA – 6
(b) Path
(a) Target
2012 2012

2013 2013

2014 2014
Figure IA.1: ECB Monetary Policy Shocks

2015 2015
 10

5
Premium shock (bp)

-5

-10

-15
2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

(c) Premium

Notes: The figure depicts monetary policy shocks by the European Central Bank, computed based on the
repricing of various interest rates on the release of monetary policy news. The upper subfigure show target
shocks as estimated via the change in 1-month OIS rates in a (+/-) 20 minute window around ECB monetary
policy announcements. The second sub-figure shows path shocks as the change in 2-year German government
yields orthogonalized against the change in 1-month OIS rates. The third sub-figure shows premium shocks
as the change in 10-year German government bond yields orthogonalized against the change in 2-year bond
yields. The sample ranges from 2006 to 2015.

IA – 7
 Figure IA.2: BoJ Monetary Policy Shocks

1.5

0.5
Target shock (bp)

-0.5

-1

-1.5

-2

-2.5
2009
2010

2011

2012

2013

2014

2015
(a) Target

0.6

0.4

0.2
Path shock (bp)

-0.2

-0.4

-0.6
2009
2010

2011

2012

2013

2014

2015

(b) Path

IA – 8
 1

0.5
Premium shock (bp)

-0.5

-1

-1.5
2009
2010

2011

2012

2013

2014

2015

(c) Premium

Notes: The figure depicts monetary policy shocks by the Bank of Japan, computed based on the repricing
of various interest rates on the release of monetary policy news. The upper subfigure show target shocks as
estimated via the change in 1-month OIS rates in a (+/-) 20 minute window around BoJ monetary policy
announcements. The second sub-figure shows path shocks as the change in 2-year Japanese government yields
orthogonalized against the change in 1-month OIS rates. The third sub-figure shows premium shocks as the
change in 10-year Japanese government bond yields orthogonalized against the change in 2-year bond yields.
The sample ranges from 2009 to 2015.

IA – 9
 Figure IA.3: BoE Monetary Policy Shocks

30

20

10

0
Target shock (bp)

-10

-20

-30

-40

-50

-60

-70
2007
2008

2009

2010

2011

2012

2013

2014

2015
(a) Target

10

0
Path shock (bp)

-5

-10

-15

-20
2007
2008

2009

2010

2011

2012

2013

2014

2015

(b) Path

IA – 10
 10

5
Premium shock (bp)

-5

-10
2007
2008

2009

2010

2011

2012

2013

2014

2015

(c) Premium

Notes: The figure depicts monetary policy shocks by the Bank of England, computed based on the repricing
of various interest rates on the release of monetary policy news. The upper subfigure show target shocks as
estimated via the change in 1-month OIS rates in a (+/-) 20 minute window around BoE monetary policy
announcements. The second sub-figure shows path shocks as the change in 2-year UK government yields
orthogonalized against the change in 1-month OIS rates. The third sub-figure shows premium shocks as the
change in 10-year UK government bond yields orthogonalized against the change in 2-year bond yields. The
sample ranges from 2007 to 2015.

IA – 11
 Path shock (bp) Target shock (bp)

0
5
10
15

-5

-15
-10
0
10
20
30

-30
-20
-10
2007 2007

2008 2008

2009 2009

2010 2010

2011 2011

(b) Path

IA – 12
(a) Target
2012 2012

2013 2013

2014 2014
Figure IA.4: BoC Monetary Policy Shocks

2015 2015
 4

2
Premium shock (bp)

-1

-2

-3

-4
2007

2008

2009

2010

2011

2012

2013

2014

2015

(c) Premium

Notes: The figure depicts monetary policy shocks by the Bank of Canada, computed based on the repricing
of various interest rates on the release of monetary policy news. The upper subfigure show target shocks as
estimated via the change in 1-month OIS rates in a (+/-) 20 minute window around BoC monetary policy
announcements. The second sub-figure shows path shocks as the change in 2-year Canadian government
yields orthogonalized against the change in 1-month OIS rates. The third sub-figure shows premium shocks
as the change in 10-year Canadian government bond yields orthogonalized against the change in 2-year bond
yields. The sample ranges from 2007 to 2015.

IA – 13
 Path shock (bp) Target shock (bp)

0
5
10
15

-5

-25
-20
-15
-10
0
10
20
30
40

-30
-20
-10
2007 2007

2008 2008

2009 2009

2010 2010

2011 2011

(b) Path

IA – 14
(a) Target
2012 2012

2013 2013

2014 2014
Figure IA.5: RBA Monetary Policy Shocks

2015 2015
 6

2
Premium shock (bp)

-2

-4

-6
2007

2008

2009

2010

2011

2012

2013

2014

2015

(c) Premium

Notes: The figure depicts monetary policy shocks by the Reserve Bank of Australia, computed based on
the repricing of various interest rates on the release of monetary policy news. The upper subfigure show
target shocks as estimated via the change in 1-month OIS rates in a (+/-) 20 minute window around RBA
monetary policy announcements. The second sub-figure shows path shocks as the change in 2-year Australian
government yields orthogonalized against the change in 1-month OIS rates. The third sub-figure shows
premium shocks as the change in 10-year Australian government bond yields orthogonalized against the
change in 2-year bond yields. The sample ranges from 2006 to 2015.

IA – 15
 Figure IA.6: SNB Monetary Policy Shocks

2.5

1.5

1
Target shock (bp)

0.5

-0.5

-1

-1.5

-2
2010

2011

2012

2013

2014

2015
(a) Target

0
Path shock (bp)

-1

-2

-3

-4

-5

-6
2010

2011

2012

2013

2014

2015

(b) Path

IA – 16
 1.5

0.5
Premium shock (bp)

-0.5

-1

-1.5

-2
2010

2011

2012

2013

2014

2015

(c) Premium

Notes: The figure depicts monetary policy shocks by the Swiss National Bank, computed based on the
repricing of various interest rates on the release of monetary policy news. The upper subfigure show target
shocks as estimated via the change in 1-month OIS rates in a (+/-) 20 minute window around SNB monetary
policy announcements. The second sub-figure shows path shocks as the change in 2-year Swiss government
yields orthogonalized against the change in 1-month OIS rates. The third sub-figure shows premium shocks
as the change in 10-year Swiss government bond yields orthogonalized against the change in 2-year bond
yields. The sample ranges from 2010 to 2015.

IA – 17
Supplementary Tables

IA – 18
 Table IA.3: Spillovers and Bilateral Financial Openness

Target Path Premia R2

Foreign currency ECB 0.06 0.05 0.13 2.6%

debt (1.50) (1.36) (2.28)
ECB (excl. EA) 0.00 0.12 0.13 3.6%
(0.04) (3.57) (2.39)
Fed 0.09 0.05 0.00 5.7%
(2.00) (1.97) (0.15)
Portfolio debt ECB -0.10 0.09 0.08 2.4%
from originator c’try (-1.50) (1.81) (0.98)
ECB (excl. EA) 0.08 0.13 0.17 3.5%
(1.56) (3.18) (3.23)
Fed 0.04 0.02 0.10 5.0%
(0.75) (0.56) (2.68)
Portfolio equity ECB 0.00 0.16 0.08 2.4%
from originator c’try (0.06) (3.77) (1.86)
ECB (excl. EA) 0.02 0.06 0.05 3.1%
(0.62) (2.23) (1.18)
Fed 0.03 0.00 0.12 5.0%
(0.43) (-0.01) (2.51)
Loan ECB -0.09 0.09 -0.02 2.3%
from originator c’try (-1.94) (2.34) (-0.22)
ECB (excl. EA) -0.03 0.09 0.10 3.2%
(-0.85) (2.89) (1.59)
Fed 0.00 -0.02 0.02 4.8%
(0.10) (-0.77) (0.67)
FDI ECB -0.02 0.06 0.03 3.5%
from originator c’try (-0.61) (1.95) (0.63)
ECB (excl. EA) -0.08 0.01 -0.05 9.3%
(-2.51) (0.44) (-1.05)
Fed 0.02 0.00 0.02 9.1%
(0.47) (0.07) (0.89)

Notes: The table reports the results of panel regressions as given by Equation (2) with various recipient-
specific conditional variable Xi,t−1 measuring bilateral financial openness. The dependent variable is the
daily change in 10-year bond yields in our set of 47 recipient countries. As regressors, besides the monetary
shocks for the ECB and the Fed, specifications also include the daily change in the US Treasury yield and
the VIX as global controls. The reported coefficients correspond to γ bj in Equation (2). t-stat from Panel-
Corrected Standard Errors (PCSE) are given in parentheses. Cells coloured red (green) indicate statistically
significant positive (negative) coefficients at a 10% confidence level. Financial flows (% of GDP) are measured
in standard deviations from the mean.
IA – 19
 Table IA.4: Spillovers and Bilateral Financial Openness (cont’d)

Target Path Premia R2

Portfolio debt ECB 0.07 0.14 0.16 2.7%

to originator c’try (1.28) (3.40) (2.35)
ECB (excl. EA) 0.11 0.08 0.15 3.9%
(2.30) (1.98) (2.33)
Fed 0.02 -0.04 0.01 5.1%
(0.41) (-1.18) (0.21)
Portfolio equity ECB 0.09 0.14 0.15 3.5%
to originator c’try (1.90) (3.43) (2.61)
ECB (excl. EA) 0.08 0.09 0.12 6.8%
(2.24) (2.62) (2.04)
Fed 0.01 -0.02 0.10 4.9%
(0.09) (-0.65) (2.19)
Loan ECB 0.02 0.09 0.16 3.7%
to originator c’try (0.33) (2.50) (2.05)
ECB (excl. EA) -0.03 0.08 0.14 3.3%
(-0.93) (2.51) (3.03)
Fed -0.01 -0.03 -0.01 8.1%
(-0.36) (-1.21) (-0.21)
FDI ECB 0.04 0.11 0.08 2.5%
to originator c’try (1.20) (3.74) (1.73)
ECB (excl. EA) 0.07 0.06 0.05 3.2%
(2.51) (2.26) (1.25)
Fed -0.04 -0.04 0.01 5.5%
(-1.12) (-2.06) (0.53)

Notes: The table reports the results of panel regressions as given by Equation (2) with various recipient-
specific conditional variable Xi,t−1 measuring bilateral financial openness. The dependent variable is the
daily change in 10-year bond yields in our set of 47 recipient countries. As regressors, besides the monetary
shocks for the ECB and the Fed, specifications also include the daily change in the US Treasury yield and
the VIX as global controls. The reported coefficients correspond to γ bj in Equation (2). t-stat from Panel-
Corrected Standard Errors (PCSE) are given in parentheses. Cells coloured red (green) indicate statistically
significant positive (negative) coefficients at a 10% confidence level. Financial flows (% of GDP) are measured
in standard deviations from the mean.

IA – 20
 Table IA.5: Spillovers and Financial Openness

Target Path Premium R2

Chin-Ito index ECB -0.09 0.10 0.08 2.7%

(-2.01) (2.64) (1.25)
Fed -0.04 -0.04 0.07 5.7%
(-0.54) (-1.09) (1.55)

Debt assets ECB -0.02 0.08 0.14 2.5%

(-0.47) (2.67) (2.77)
Fed 0.02 -0.02 0.02 5.5%
(0.34) (-0.80) (0.72)

Portfolio assets ECB 0.02 0.09 0.18 2.6%

(0.44) (2.28) (3.42)
Fed 0.04 0.00 0.10 5.6%
(0.71) (-0.14) (2.52)

FDI assets ECB 0.00 0.10 0.14 2.6%

(-0.10) (3.10) (3.07)
Fed 0.03 0.01 0.06 5.5%
(0.55) (0.26) (1.94)

Financial derivatives ECB 0.00 0.10 0.17 2.6%

(-0.02) (2.84) (3.47)
Fed 0.00 0.05 0.01 5.5%
(-0.06) (1.09) (0.38)

Notes: The table reports the results of panel regressions as given by Equation (2) with various recipient-
specific conditional variable Xi,t−1 measuring bilateral financial openness. The dependent variable is the daily
change in 10-year bond yields in our set of 47 recipient countries. As regressors, besides the monetary shocks
for the ECB and the Fed, specifications also include the daily change in the US Treasury yield and the VIX
as global controls. The reported coefficients correspond to γ bj in Equation (2). t-stat from Panel-Corrected
Standard Errors (PCSE) are given in parentheses. Cells coloured red (green) indicate statistically significant
positive (negative) coefficients at a 10% confidence level. Financial stocks (% of GDP) are measured in
standard deviations from the mean.

IA – 21
 Table IA.6: Spillovers and Financial Openness (cont’d)

Target Path Premium R2

Debt liab. ECB -0.06 0.10 0.14 2.6%

(-1.33) (2.64) (2.08)
Fed 0.01 -0.02 0.03 5.5%
(0.18) (-0.64) (1.04)

Portfolio liab. ECB 0.00 0.07 0.10 2.5%

(-0.06) (1.86) (2.31)
Fed 0.04 -0.02 0.06 5.5%
(0.62) (-0.72) (1.75)

FDI liab. ECB -0.01 0.08 0.13 2.5%

(-0.17) (2.62) (3.06)
Fed 0.03 0.02 0.05 5.5%
(0.77) (0.64) (2.06)

Financial derivative ECB 0.00 0.10 0.16 2.6%

liab. (-0.11) (2.96) (3.42)
Fed -0.01 0.05 0.01 5.5%
(-0.10) (1.10) (0.31)

Notes: The table reports the results of panel regressions as given by Equation (2) with various recipient-
specific conditional variable Xi,t−1 measuring bilateral financial openness. The dependent variable is the daily
change in 10-year bond yields in our set of 47 recipient countries. As regressors, besides the monetary shocks
for the ECB and the Fed, specifications also include the daily change in the US Treasury yield and the VIX
as global controls. The reported coefficients correspond to γ bj in Equation (2). t-stat from Panel-Corrected
Standard Errors (PCSE) are given in parentheses. Cells coloured red (green) indicate statistically significant
positive (negative) coefficients at a 10% confidence level. Financial stocks (% of GDP) are measured in
standard deviations from the mean.

IA – 22
Previous volumes in this series

756 Financial structure and income inequality Michael Brei, Giovanni Ferri and
November 2018 Leonardo Gambacorta

755 Measuring financial cycle time Andrew Filardo, Marco Lombardi

November 2018 and Marek Raczko

754 Euro area unconventional monetary policy Fernando Avalos and

November 2018 and bank resilience Emmanuel C Mamatzakis

753 Currency depreciation and emerging market Valentina Bruno and

October 2018 corporate distress Hyun Song Shin

752 The effects of prudential regulation, financial Pierre-Richard Agénor , Leonardo

October 2018 development and financial openness on Gambacorta , Enisse Kharroubi and
economic growth Luiz Awazu Pereira da Silva

751 Exchange rates and prices: evidence from the Raphael Auer, Ariel Burstein and
October 2018 2015 Swiss franc appreciation Sarah M Lein

750 Forward guidance and heterogeneous beliefs Philippe Andrade, Gaetano Gaballo,
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748 Domestic and global output gaps as inflation Martina Jašová, Richhild Moessner
September 2018 drivers: what does the Phillips curve tell? and Előd Takáts

747 How Do Credit Ratings Affect Bank Lending Stijn Claessens, Andy Law and
September 2018 Under Capital Constraints? Teng Wang

746 What drives local lending by global banks? Stefan Avdjiev, Uluc Aysun and
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745 Financial stress in lender countries and capital Ilhyock Shim and Kwanho Shin
September 2018 outflows from emerging market economies

744 Why you should use the Hodrick-Prescott Mathias Drehmann and
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743 An intermediation-based model of exchange Semyon Malamud and

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742 Quantitative or qualitative forward guidance: Gunda-Alexandra Detmers, Özer

August 2018 Does it matter? Karagedikli and Richhild Moessner

All volumes are available on our website www.bis.org.