The International Spillover Effect of Japanese Negative Interest Rate Policy

Abstract

We investigated the international spillover effect of the Japanese negative interest rate policy (NIRP) on six multinational equity indices in this article. Based on the generalized autoregressive conditional heteroscedasticity (GARCH) model, we examined the NIRP spillover effect over testing equity indices after controlling the quantitative easing (QE) policy effect and the interaction effect between NIRP and QE. The six inspecting equity indices included the Asia Pacific regional equity index, the Global equity market index, the Emerging equity market index, and their financial-industry sub-indices for these three broad-based equity indices. Without considering the consequence of NIRP interacting with QE, the estimated independent NIRP effect showed positive affections on the conditional mean and negative impacts on the conditional volatility for testing equity indices. However, the previous outcomes could reverse by large enough QE since the significant interaction coefficient shared the opposite sign against the independent coefficient. For example, the conditional variance equation for the Global equity market index and Global financial industry sub-index verified the possible destabilizing effect contingent on the large enough QE.