Primary research interests
Empirical Asset Pricing / International Finance / Financial Economics
Tilburg University and CentER
Department of Finance
Joost Driessen, Bertrand Melenberg, Lieven Baele
I will be attending the European job market, 6–7 December 2018 in Naples, Italy, the ASSA meeting, 4–6 January 2019 in Atlanta, Georgia, and am available all days for interviews.
My main message
China has grown essentially into the biggest economy in the world, is an important player in commodity markets, holds a substantial amount of the global public debt, and has become an important determinant of global nominal interest rates. The FED and the ECB should closely monitor the factors such as the Chinese growth and inflation to prevent any unnecessary negative spillovers on the US and EA growth and long-term nominal interest rates. Especially, because the FED began to tighten the monetary policy in the US, and the ECB’s net asset purchases are expected to end in December 2018.
To measure the global spillovers of a Chinese slowdown on the long-term nominal interest rates in the US/Germany, I model the US/German nominal term structure jointly in the post financial crisis (FC) sample, including the Chinese leading indicator as a new factor. I use an affine term structure model and decompose changes in the long-term nominal interest rates into (1) changes in the expected future nominal short rate, “the signaling channel,” and (2) the term premium, “the portfolio balance channel.” A drop in the Chinese leading indicator results in a significant drop in the US/German growth over the first year. In the US, this leads to clear signaling effects but no portfolio balancing effects. In Germany, I find both signaling and portfolio balancing effects, but the direction of these effects is opposite to what one might expect. To deal with the different monetary regimes since the Sovereign debt crisis (SDC) I also model the German term structure independently from the US in the post SDC sample. Like in the US, I now find that in Germany, a lower Chinese leading indicator has important signaling effects in the expected direction. However, (opposite) portfolio balancing effects neutralize these signaling effects on the estimated 5-year Bund yield.
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