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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. This paper uses dynamic term structure models to decompose international yield changes into changes in expected short-term interest rates and term premia, which sheds light on the channels through which the LSAP effects occurred. We find that LSAPs had substantial signaling effects for the US and Canada: Changes in expected future policy rates contributed significantly to lower long-term yields. The signaling effect on Canadian rates is intuitively attractive because conventional US monetary policy shocks have historically strongly influenced Canadian interest rates. For Australia and Germany, we find more mixed evidence for signaling effects. The evidence for Japan suggests that portfolio balance effects were the dominant driver of more modest LSAP effects. The absence of signaling effects for Japanese rates is consistent with their relative insensitivity to conventional US monetary policy shocks.