Steven B. Kamin - Federal Reserve · exchange rates (2013) but acting through di erent parts of the...

Cross-Border Spillovers from Monetary Policy

Steven B. Kamin

Director, International Finance Division

Federal Reserve Board March 1, 2016

Prepared for the 2016 PBoC-FRBNY Joint Symposium:Global Macro Economy and Governance Under Monetary Policy Divergence

Acknowledgments

Based on research with John Ammer, Chris Erceg, andMichiel De Pooter.

Excellent research assistance by Alex Mechanick and AndrewRys

Steven B. Kamin Cross-Border Spillovers from Monetary Policy 2 / 36

Disclaimer

This presentation represents my own views and not necessarilythose of the Federal Reserve Board of Governors or its staff.


Plan of Talk

Simple framework for understanding spillovers from monetarypolicy.

Estimate of the effects of U.S. monetary policy on foreigneconomic activity.

Are monetary policy spillovers stabilizing or destabilizing forthe global economy?

Challenges posed by monetary policy spillovers.


Key Spillover Channels from Monetary Policy

Exchange rates (expenditure shifting)




Domestic demand (expenditure increasing)




Domestic demand (expenditure increasing)

Financial spillovers abroad (expenditure increasing)


Back-of-the-Envelope Estimates of U.S. Monetary PolicySpillovers

Assume monetary easing sufficient to lower U.S. Treasuryyields by 25 basis points.

Exchange rate channel:

Lowers dollar about 1 percent


Empirical Relationships: U.S. 10 Year and Broad Dollar

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−1.

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Bro

ad D

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r

Quantitative Easing and Forward GuidanceAnnouncements (2008−2015)*

−75 −50 −25 0 25

∆S = −0.07 + 0.02∆Y (.083) (.006)

Percent Change, 1 day

−.63

U.S. 10−Year Yield (Basis Points, 1−day change)* 29 announcements between 2008 and 2015.




Exchange rate channel:

Lowers dollar about 1 percentBoosts U.S. net exports by .15 percent of GDPLowers foreign GDP about .05 percent




Domestic demand channel:

Raises domestic demand by .5 percentRaises U.S. imports by .15 percent of GDPRaises foreign GDP about .05 percent




Financial spillovers channel:

Lowers foreign yields by 10 basis points


Empirical Relationships: U.S. and German Yields

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−20

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010

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Ger

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10−

Year

Yie

ld


−75 −50 −25 0 25

∆Y* = −1.51 + 0.43∆Y (1.022) (.072)

Basis Points, 1−day change

−12.3



Response of EME Yields to U.S. Yields

Average Observed Response of EME Sovereign Yields to U.S.Treasury Yields*

Country Response (Basis points)

Brazil -67Poland -20South Africa -18Korea -15Mexico -14Average -13Singapore -13Thailand -12Hungary -11Taiwan -10Indonesia -8Czech Republic -8Malaysia -7Hong Kong -7India -6China -5Turkey -2Philippines 0

**For two-day windows around 23 QE announcements, scaled to a -25 bp change in 10-year U.S. Treasury yield.

David Bowman, Juan M. Londono, and Horacio Sapriza. “U.S. Unconventional Monetary Policy andTransmission to Emerging Market Economies.” Federal Reserve Board International Finance Discussion Papers,No. 1109. June 2014. Steven B. Kamin Cross-Border Spillovers from Monetary Policy 14 / 36



Financial spillovers channel:

Lowers foreign yields by 10 basis pointsRaises foreign GDP about .25 percent




Exchange rate channel:Lowers foreign GDP about .05 percent

Domestic demand channel:Raises foreign GDP about .05 percent

Financial spillovers channel:Raises foreign GDP about .25 percent

First two channels offset, leaving financial spillovers todominate.

But overall effect not very large.


SIGMA Results: 25 basis point reduction in 10-Year U.S.Treasury Yields

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

1. U.S. GDPPercent deviation from baseline

0 8 16 24 32

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

3. U.S. Real ImportsPercent deviation from baseline

0 8 16 24 32

-1.4

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

2. Broad Real DollarPercent deviation from baseline

0 8 16 24 32

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

4. Foreign GDPPercent deviation from baseline

0 8 16 24 32


Size and Direction of Monetary Policy Spillovers CannotBe Boiled Down to A Single Coefficient

Depends on relative strength of the three channels.

May differ by country receiving spillovers.

May differ over time - especially financial spillovers.

May differ depending on whether conventional orunconventional monetary policy.


Unconventional versus Conventional Policy Effects onAsset Prices

Rogers, Scotti, and Wright (2014) – similar QE announcementeffects on AFE asset prices (for given impact on U.S. Treasuryyields) as in prior event studies on policy rates.

Glick and Leduc – report similar effects on AFE dollarexchange rates (2013) but acting through different parts ofthe term structure (2015).

Bowman, Londono, and Sapriza (2014) – similar EME assetprice responses to changes in Treasury yields.

Takats and Vela (2014) – weaker post-2007 relation betweenEME and U.S. policy rates but stronger in five-year yields.

Chen, Mancini-Griffoli, and Sahay (2014) – stronger spilloversfrom unconventional policy.


Unconventional versus Conventional Policy:U.S. 10 Year and Broad Dollar

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−75 −50 −25 0 25

∆S = −0.07 + 0.02∆Y (.083) (.006)


−.63


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Conventional Monetary Policy*

Bro

ad D

olla

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−40 −25 −10 5 20

∆S = −0.04 + 0.019∆Y (.023) (.004)


U.S. 10−Year Yield (Basis Points, 1−day change)* 95 FOMC rate change surprises between July 1995 andDecember 2006.

−.50


Unconventional versus Conventional Policy:U.S. and German Yields

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−20

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10−

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−75 −50 −25 0 25

∆Y* = −1.51 + 0.43∆Y (1.022) (.072)


−12.3


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Conventional Monetary Policy*

Ger

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10−

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Yie

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−40 −25 −10 5 20

∆Y* = .37 + 0.37∆Y (.513) (.099)


U.S. 10−Year Yield (Basis Points, 1−day change)* 95 FOMC rate change surprises between July 1995 andDecember 2006.

−9


Are Monetary Policy Spillovers Stabilizing or Destabilizingfor the Global Economy?

Based on estimates for United States, monetary policyspillovers do not seem very large.

But still worth asking: do they move economic conditions inROW toward or away from their equilibrium levels?

It depends...

Direction of monetary policy spillovers: positive or negative?Nature of the shock to which monetary policy is responding?


U.S. Recession, Foreign Monetary Policy on Hold:

With and without U.S. Monetary Expansion

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-6

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0 4 8 12 16

No U.S. MonetaryExpansion

With U.S. MonetaryExpansion

-12

-10

-8

-6

-4

-2

0

2

3. U.S. Real ImportsPercent deviation from baseline

0 4 8 12 16

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

2. U.S. Real Policy RatePercentage point deviation from baseline

0 4 8 12 16

-12

-10

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-6

-4

-2

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2


0 4 8 12 16


World GDP Growth


U.S. Recession, Foreign Strength, Foreign Monetary Policy on Hold:

With and without U.S. Monetary Expansion

-10

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0 4 8 12 16



-0.5

-0.4

-0.3

-0.2

-0.1

0.0

0.1

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3. Foreign InflationPercentage point deviation from baseline

0 4 8 12 16

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

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0.5

2. U.S. Real Policy RatePercentage point deviation from baseline

0 4 8 12 16

-10

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-6

-4

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4

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0 4 8 12 16


Monetary Policy As An Equilibrating Mechanism

Even if monetary policy spillovers push an economy away fromequilibrium,

independent monetary policy in a floating exchange rateregime can push the economy back toward equilibrium.

Applies to all shocks, not just monetary policy spillovers.


U.S. Recession, Foreign Strength Offset by PolicyTightening

-10

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-6

-4

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0 4 8 12 16



Foreign MonetaryPolicy Tightens

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

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0.2

0.3

3. Foreign InflationPercentage point deviation from baseline

0 4 8 12 16

0.0

0.2

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0.6

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1.0

1.2

2. Foreign Real Policy RatePercentage point deviation from baseline

0 4 8 12 16

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0 4 8 12 16


Policy Divergences

Concerns have been expressed about spillovers from a futurenormalization of U.S. monetary policy. But considerationsdiscussed before still apply:

Estimated effects of spillovers not particularly large.

Foreign central banks already loosening.

Normalization of U.S. policy predicated on continued strengthin U.S. economy, which supports foreign activity.

U.S. net exports already subtracting more than 1/2percentage point from U.S. GDP growth in 2015.



Limits to ability of monetary policy to offset external shocks.

Lags

Zero lower bound

With high inflation, may be difficult to pursue countercyclicalpolicy



Limits to ability of monetary policy to offset external shocks.

Lags

Zero lower bound

With high inflation, may be difficult to pursue countercyclicalpolicy

Multiple objectives: e.g., export-led development strategy,financial stability


U.S. Recession, Foreign Strength Offset by PolicyTightening

-10

-8

-6

-4

-2

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4


0 4 8 12 16



Foreign MonetaryPolicy Tightens

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3. Foreign Exchange RatePercent deviation from baseline

0 4 8 12 16

Appreciation

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0.6

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1.0

1.2

2. Foreign Real Policy RatePercentage point deviation from baseline

0 4 8 12 16

-10

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-6

-4

-2

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0 4 8 12 16



Policy easing in advanced economies not the only factorcontributing to loose financial conditions in EMEs.


Real GDP Growth and Net Private Capital Inflows to EMEs

Shaghil Ahmed and Andrei Zlate. “Capital Flows to Emerging Market Economies: A Brave New World.” Journalof International Money and Finance, vol. 48 (November 2014). 221-228.


Net Private Capital Inflows to EMEs


Total Credit to Private Nonfinancial Sector


Thank you!


Steven B. Kamin - Federal Reserve · exchange rates (2013) but acting through di erent parts of the...

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