Explaining Monetary Spillovers: The Matrix Reloaded

BIS Working Papers  |  No 757  | 
20 November 2018



We study the strength and characteristics of interest rate spillovers from seven advanced economy central banks to 47 advanced and emerging market economies. Our main focus is on the channels through which spillovers occur and why some countries respond more than others to changes in monetary policy in advanced economies.


Interest rate co-movement is well documented, but existing work often struggles to identify whether it stems from spillovers or from common drivers. We improve on this by using cleanly identified high-frequency monetary policy surprises (including target, path and term premia shocks) to better pin down the direction and size of spillovers. 

We also test through which channels spillovers occur: (i) economic conditions, (ii) the exchange rate regime, or (iii) the impact of bond risk premia. We use a data set that encompasses bilateral and aggregate economic and financial links as well country-specific factors to explore the conditions that lead to stronger (or weaker) spillovers.


We find strong spillovers originating from the Federal Reserve and the European Central Bank. Spillovers from other advanced economy central banks (including the Bank of England and the Bank of Japan) are mild. Spillovers are more much prevalent for long-term interest rates, while short rates do not consistently respond to foreign monetary policy news. These effects tend to be larger for advanced economies, which are well integrated in global capital markets, than they are for emerging market economies. 

We get a clear picture of the factors behind different spillover intensities across countries. There is no support for a channel operating through macroeconomic interlinkages, and partial support for an exchange rate regime channel. In support of a channel operating through risk premia, we find that financial openness is the strongest factor in explaining the strength of spillovers across countries.



Using monetary policy shocks for seven advanced economy central banks, measured at high-frequency, we document the strength and characteristics of interest rate spillovers to 47 advanced and emerging market economies. Our main goal is to assess different channels through which spillovers occur and why some countries' interest rates respond more than others. We find that there is no evidence that spillovers relate to real linkages, such as trade flows. There is some indication that exchange rate regimes influence the extent of spillovers. By far the strongest determinant of interest rate spillovers is financial openness. Countries that have stronger bilateral (and aggregate) financial links with the US or euro area are susceptible to stronger interest rate spillovers. These effects are much more pronounced at the longer end of the yield curve, indicating that while countries retain policy rate independence, financial conditions are influenced by global yields.

JEL classification: E44, F36, F42, F65

Keywords: monetary policy spillovers, high-frequency data, financial integration