International Channels of the Fed’s Unconventional Monetary Policy
Previous research has established that the Federal Reserve’s large scale asset purchases (LSAPs) significantly influenced international bond yields. We use dynamic term structure models to uncover to what extent signaling and portfolio balance channels caused these declined. For the U.S. and Canada, the evidence supports the view that LSAPs had substantial signaling effects. For Australian and German yields, signaling effects were more moderate and portfolio balance effects likely played a larger role. Both signaling and portfolio balance effects were small for Japanese yields. Our conclusions regarding the empirical importance of LSAP channels are consistent with predictions based on interest rate dynamics during normal times: Signaling effects tend to be large for countries with strong yield responses to conventional U.S. monetary policy surprises, and portfolio balance effects depend on the degree of substitutability across countries, measured using correlation between foreign and U.S. bond returns.