Monetary policy expectations and global spillovers: A global value at risk approach

The impact of monetary policy decisions is still at the core of an intensive debate among policymakers and researchers. Against the background of the recent crisis, global liquidity measures have attracted considerable attention in this context since focusing on national aggregates neglects important (global) dynamics. In particular, the question of whether an increase in global liquidity is responsible for speculative pressure and volatility of commodity prices remains controversial.

A broad line of research has already focused on the link between global liquidity, macroeconomic aggregates and asset prices, for instance in terms of cointegrating relationships (Sousa and Zaghini, 2006; Giese and Tuxen, 2008; Belke et al., 2010). However, less is known about expectation effects resulting from monetary policy decisions and the resulting spillover effects. This paper contributes by analysing global spillover effects resulting from expectation changes based on a global value at risk approach in the spirit of Pesaran and Smith (2009).

Our sample consists of monthly data from 2001 until 2015. Survey data on interest rate expectations obtained from FX4casts formerly known as the Financial Times Currency Forecaster. In general, expectations are provided for 3, 6 and 12 months.  The 10 economies under observation include the Eurozone, US, China, India, UK, Australia, Canada, Brazil, Japan and Russia.

Based on theoretical considerations, we argue that changes in the expected long-term interest rate should result in international spillover effects. Our results highlight that effects stemming from expectations about US interest rates result in several significant effects, for example on exchange rates and stock prices, around the globe.. Effects of a negative shock on expected European long- term interest rates are not as strong as for the US, and in most cases (except for the UK) not significant.