International monetary policy spillovers: Linkages between U.S. and South American yield curves

• Published in: International review of economics & finance Vol. 76; pp. 737 - 754
• Main Authors: Cavaca, Igor Bastos, Meurer, Roberto
• Format: Journal Article
• Language: English
• Published: Elsevier Inc 01-11-2021
• Subjects: Interest rates; Monetary policy; South America; Spillovers; Term structure; South America; Term structure; E43; C58; G21; Spillovers; Monetary policy; G12; Interest rates
• ISSN: 1059-0560; 1873-8036
• DOI: 10.1016/j.iref.2021.07.007

This paper investigates spillovers between the latent factors of the term structure of the interest rates of the United States and selected South American countries. We show how interest rates of different maturities of these countries interact. The term structure of the interest rate is estimated using the Dynamic Nelson-Siegel model, extracted through the Kalman filter. The main contribution of this article is the use of these spillover indices for stock markets developed by Diebold and Yilmaz (2009, 2012) for the relation between term structures of different countries. The results show a high degree of spillover in the level (22.79%), slope (25.53%), and curvature (15.18%) factors, with high oscillation of transmission intensities over time. There is a substantial increase in the spillover index during financial crises and other high-volatility periods. The results are important because they show the existence and intensity of international monetary spillovers, serving as a framework for the calibration of models used in monetary policy, as they are sensitive to international shocks. Moreover, changes in the interest rate levels may have impact on sectors that are sensitive to long-term rates and global bond markets.
•We study the interaction of interest rates between the U.S. and South American countries.•We show the existence of international spillovers of monetary policy.•The U.S. is shown to be a net transmitter of shocks to the global financial system.•There are even stronger linkages among the yield curves of the South American countries.•The spillovers we found can help the calibration of models used in monetary policy