Henry Weiland and Megan Yeo, Harvard University
Do foreign central bank policy announcements impact domestic markets? In which direction do these spillovers occur? To answer these questions, we use changes in a country’s two-year nominal yield around policy announcements as a proxy for monetary shocks. We aim to determine the causal effect of these announcements on other countries’ financial instruments. We observe significant movements in 10-year yield spreads surrounding monetary policy announcements in developed economies, yet not stemming from announcements in emerging-market economies. Results appear most pronounced among geographic neighbors. We also find significant results for the Bank of Japan prior to the Great Financial Crisis, and the Federal Reserve after the Great Financial Crisis. We extend this framework to measure the response of break-even inflation rates, foreign exchange, and equities to policy announcements and macroeconomic releases. Our findings contribute to the literature on international bond market spillovers and central bank independence.
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