Unconventional Monetary Policy and International Interest Rate Spillovers

After the 2008 global financial crisis, advanced economies turned to unconventional monetary policies to provide additional monetary stimulus while short-term interest rates were constrained by their effective lower bound. However, the speed of economic recovery differed markedly among these economies, leading to differences in the timing and intensity of unconventional monetary policies across central banks. These differences may have generated “spillover effects” that undermined policy tightening in the United States after 2015.

Karlye Dilts Stedman assesses whether monetary policies from the European Central Bank, the Bank of Japan, and the Bank of England affect U.S. borrowing costs at and away from the effective lower bound. She finds evidence of spillovers from each of these central banks to the United States as well as evidence that these spillovers increased during the asynchronous withdrawal from unconventional monetary policy. Her results suggest that in the absence of international spillovers, long-term yields in the United States would have been higher than those observed at the end of 2017.