Monetary Policy and Financial Spillovers: Losing Traction?

44 Pages Posted: 8 Oct 2015

See all articles by Piti Disyatat

Piti Disyatat

Puey Ungphakorn Institute for Economic Research, Bank of Thailand

Phurichai Rungcharoenkitkul

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: October 2015

Abstract

Has financial globalisation compromised central banks' ability to manage domestic financial conditions? This paper tackles this question by studying the dynamics of bond yields encompassing 31 advanced and emerging market economies. To gauge the extent to which external financial conditions complicate the conduct of monetary policy, we isolate a "contagion" component by focusing on comovements in measures of bond return risk premia that are unrelated to economic fundamentals. Our contagion measure is designed to more accurately capture spillovers driven by exogenous global shifts in risk preference or appetite. The analysis reaches several conclusions that run counter to popular presumptions based on comovements in bond yields. In particular, emerging market economies appear to be much less susceptible to global contagion than advanced economies, and the overall sensitivities to contagion have not increased post-crisis.

Keywords: Monetary policy, financial spillovers, contagion, interest rates, trilemma, bond risk premium, capital flows

JEL Classification: E40, E43, E44, E50, E52, F30, F41, G15

Suggested Citation

Disyatat, Piti and Rungcharoenkitkul, Phurichai, Monetary Policy and Financial Spillovers: Losing Traction? (October 2015). BIS Working Paper No. 518, Available at SSRN: https://ssrn.com/abstract=2670133

Piti Disyatat (Contact Author)

Puey Ungphakorn Institute for Economic Research, Bank of Thailand ( email )

273 Samsen Road
Bangkhunphrom, Bangkok 10200
Thailand

Phurichai Rungcharoenkitkul

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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