Did Quantitative Easing Affect Interest Rates Outside the US? New Evidence Based on Interest Rate Differentials

Abstract

This paper explores the effects of non-standard monetary policies on international yield relationships. Based on a descriptive analysis of international long-term yields, we find evidence that long-term rates followed a global downward trend prior to as well as during the financial crisis. Comparing interest rate developments in the US and the eurozone, it is difficult to detect a distinct impact of the first round of the Fed's quantitative easing program (QE1) on US interest rates for which the global environment – the global downward trend in interest rates – does not account. Motivated by these findings, we analyze the impact of the Fed’s QE1 program on the stability of the US-euro long-term interest rate relationship by using a CVAR (co-integrated vector auto-regressive) model and, in particular, recursive estimation methods. Using data gathered between 2002 and 2014, we find limited evidence that QE1 caused the break-up or destabilized the transatlantic interest rate relationship. Taking global interest rate developments into account, we thus find no significant evidence that QE had any independent, distinct impact on US interest rates.

Keywords: quantitative easing, QE, eurozone, financial crisis, US, US-euro