## U.S. Monetary Policy Normalization and Global Interest Rates

_IMF Working Papers, September 29, 2016_

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## Bibliographic details
- Authors: Carlos Caceres, Yan Carriere-Swallow, Ishak Demir, Bertrand Gruss
- Published: September 29, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475543056.001

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### Summary findings
- The paper studies the impact of U.S. interest rates on rates in other countries as the Federal Reserve normalizes monetary policy.
- There is a modest but nontrivial pass-through from U.S. to domestic short-term interest rates on average.
- Much of the short-term comovement reflects synchronized business cycles.
- There is important heterogeneity across countries, with evidence of limited monetary autonomy in some cases.
- The co-movement of longer term interest rates is larger and more pervasive than for short-term rates.
- Most countries receive greater spillovers from U.S. interest rate movements that surprise markets versus those that are anticipated.
- Countries respond differently to shocks in the U.S. term premium versus shocks to the expected path of risk-free rates.
- Determinants of monetary autonomy with strong evidence include: exchange rate flexibility and capital account openness; other relevant factors include dollarization of financial system liabilities and the credibility of fiscal and monetary policy.

### Short-term interest rates
- Finding: Modest but nontrivial pass-through from U.S. to domestic short-term interest rates on average.
- Mechanism: Much of the comovement is explained by synchronized business cycles.
- Heterogeneity: Some countries exhibit limited monetary autonomy, indicating cross-country variation in pass-through.

### Longer-term interest rates
- Finding: Co-movement of longer term interest rates with U.S. rates is larger and more pervasive than for short-term rates.
- Implication: Global yield curves show stronger alignment with U.S. longer-term rate movements.

### Surprises versus anticipated U.S. rate movements
- Finding: Distinguishing between surprises and anticipated U.S. interest rate movements reveals that most countries experience greater spillovers from surprises (unanticipated rate hikes) than from anticipated moves.

### Term premium versus expected path of risk-free rates
- Finding: Movements in the U.S. term premium and movements in the expected path of risk-free rates have different effects across countries.
- Conclusion: Countries respond differently to term-premium shocks compared with shocks to the expected path of risk-free rates.

### Determinants of monetary autonomy
- Strong evidence for the role of:
  - Exchange rate flexibility
  - Capital account openness
- Additional important factors:
  - Dollarization of financial system liabilities
  - Credibility of fiscal and monetary policy

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/u-s-44315_