International Financial Transmission of the US Monetary Policy: An Empirical Assessment

This paper proposes a way to study the transmission mechanism of the US monetary policy to foreign yield curves. It elaborates the high-frequency identification of monetary policy shocks from Piazzesi (2005) in an international setting and uses a sample of 125 policy rate decisions of the Fed to extract "realised" policy shocks. The Fed decisions span from February 1994 to December 2008 and are divided according to the direction of the policy rate move and weather they were anticipated by the Fed funds futures market. A consistent, two-country term structure model is estimated on daily data and used to assess both instantaneous and lagged reaction of foreign interest rates and forward term premia to the Fed policy rate decisions. Empirical analysis of the US - UK model shows that the most of the movement in the UK yields around policy action days results from estimated term premia. A surprise policy action seems to produce a spike in the UK premia around the short- and mid-range maturities, independently from the direction of the policy rate move. The estimated lagged reaction of the UK yields to a policy decision of the Fed is also negative, after both hikes and cuts of the policy rate. The results hold for different market price of risk specifications, after two robustness checks and for both two-country and single-country model output.