Spillovers from U.S. Monetary Policy Normalization on Brazil and Mexico's Sovereign Bond Yields

40 Pages Posted: 25 Apr 2017

See all articles by Carlos Góes

Carlos Góes

International Monetary Fund (IMF)

Herman Kamil

International Monetary Fund (IMF)

Phil de Imus

International Monetary Fund (IMF) - Policy Development and Review Department

Mercedes Garcia-Escribano

University of Chicago - Department of Economics

Roberto Perrelli

International Monetary Fund (IMF)

Shaun Roache

Temasek Polytechnic

Jeremy Zook

International Monetary Fund (IMF)

Date Written: March 2017

Abstract

This paper examines the transmission of changes in the U.S. monetary policy to local-currency sovereign bond yields of Brazil and Mexico. Using vector error-correction models, we find that the U.S. 10-year bond yield was a key driver of long-term yields in these countries, and that Brazilian yields were more sensitive to U.S. shocks than Mexican yields during 2010-13. Remarkably, the propagation of shocks from U.S. long-term yields was amplified by changes in the policy rate in Brazil, but not in Mexico. Our counterfactual analysis suggests that yields in both countries temporarily overshot the values predicted by the model in the aftermath of the Fed's 'tapering' announcement in May 2013. This study suggests that emerging markets will need to contend with potential spillovers from shifts in monetary policy expectations in the U.S., which often lead to higher government bond interest rates and bouts of volatility.

Keywords: Western Hemisphere, Brazil, Mexico, QE, tapering, local-currency sovereign bond yields, vector error correction models, General

JEL Classification: E40, F30, F40, F3, F4

Suggested Citation

Góes, Carlos and Kamil, Herman and de Imus, Phil and Garcia-Escribano, Mercedes and Perrelli, Roberto and Roache, Shaun and Zook, Jeremy, Spillovers from U.S. Monetary Policy Normalization on Brazil and Mexico's Sovereign Bond Yields (March 2017). IMF Working Paper No. 17/50, Available at SSRN: https://ssrn.com/abstract=2958201

Carlos Góes (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Herman Kamil

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Phil De Imus

International Monetary Fund (IMF) - Policy Development and Review Department ( email )

700 19th St. NW
Washington, DC 20431
United States

Mercedes Garcia-Escribano

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
United States

Roberto Perrelli

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Shaun Roache

Temasek Polytechnic ( email )

21 Tampines Ave 1
Singapore, 529757
Singapore

Jeremy Zook

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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