International monetary policy spillovers: Linkages between U.S. and South American yield curves

Abstract

This paper investigates spillovers between the latent factors of the term structure of the interest rates of the United States and selected South American countries. We show how interest rates of different maturities of these countries interact. The term structure of the interest rate is estimated using the Dynamic Nelson-Siegel model, extracted through the Kalman filter. The main contribution of this article is the use of these spillover indices for stock markets developed by Diebold and Yilmaz (2009, 2012) for the relation between term structures of different countries. The results show a high degree of spillover in the level (22.79%), slope (25.53%), and curvature (15.18%) factors, with high oscillation of transmission intensities over time. There is a substantial increase in the spillover index during financial crises and other high-volatility periods. The results are important because they show the existence and intensity of international monetary spillovers, serving as a framework for the calibration of models used in monetary policy, as they are sensitive to international shocks. Moreover, changes in the interest rate levels may have impact on sectors that are sensitive to long-term rates and global bond markets.