Globalisation, Monetary Policy and the Yield Curve

This paper examines how globalisation has affected the transmission between changes in the policy rate and the term structure of interest rates. We …first estimate a cointegrated VAR model of the US daily term structure of interest rates. We then estimate the model using monthly data to allow for feedback from the term structure to the policy rate. Finally, we isolate the effects of globalisation by applying a factor model to the term structure of eight countries. We fi…nd evidence of a structural break coinciding with the beginning of the "Conundrum" period and relate this to increased foreign official holdings of US treasuries. When we estimate our model on monthly data we find evidence for non-stationary term premia. Finally, When we remove the global factors from the yields, we find that the idiosyncratic components of the yields cointegrate. We conclude that the main impact of globalisation is on the term premium.