Decomposing Long-Term Interest Rates : An International Comparison

This work analyzes the behavior of long-term interest rates for several developed and developing economies, identifying the risk-neutral and term premium components under different methodologies. The authors analyze which of these two channels affected interest rate movements in different monetary policy regimes. Also, they quantify the transmission of U.S. long-term yield to these economies using a spillover index. They find that movements in long-term interest rates in different monetary policy regimes are related to changes in the term premium for most countries. The findings also suggest a heterogeneous behavior in the United States to other economies. In developed economies, long-term interest rates are affected in both components (risk neutral and term premium) mainly through the U.S. risk-neutral channel, whereas in developing countries, the evidence suggests that the relevant transmission channel is the term premium, which is affected by the U.S. term premium