The views expressed in this presentation are the views of the author and do not necessarily reflect the

views or policies of the Asian Development Bank Institute (ADBI), the Asian Development
Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any
consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.

Discussion on
Long-term Interest Rate Spillovers
from Major Advanced Economies to Emerging Asia
by
Ansgar Belke, Irina Dubova and Ulrich Volz

ADBI 19th Annual Conference

December 1-2, 2016

Masazumi Hattori
Institute of Economic Research
Hitotsubashi University
 The paper (1)

This paper investigates the evolution of spillovers from advanced countries long-
term bond markets to EMEs long-term bond markets, based on measures of
spillover intensities (total spillover index and directional spillover index).
Methodology: vector autoregressive (VAR) variance decompositions
Data frequency: daily data
Sample countries: 8 Asian EMEs + Hong Kong and 3 advanced economies
Asian EMEs + Hong Kong: China, Hong Kong, India, Indonesia, Korea, Malaysia, the Philippines,
Taiwan and Thailand
3 advanced economies: the US, the euro area and Japan

Sample period: May 2003 to September 2016

1
 The paper (2)

Unlike most previous researches, this paper investigates potential spillovers not
only from the US but also from the Eurozone and Japan, and even between EMEs.

Using daily data, this paper uses information that would be lost in aggregation,
analyzes the time-variations in the spillover intensities and detects sudden changes
in spillover intensities.

This paper reports the time varying and policy event-responsive intensities of the
spillovers.

2
 The paper (3)

My takeaway from this paper

Decoupling of long-term bond markets of Emerging Asian Economies (EAEs)
from the ones of the major advanced economies is an illusion.

My question
What can the EAEs do?

3
 Long-term Bond Yields: Spillovers from the AEs to the EAEs

Decoupling as an illusion

Belke, Dubova and Volz (2016) (presented paper)

4
 Long-term Bond Yields: Spillovers from Japan to the EAEs

Time varying and policy event-responsive intensities of spillovers

Belke, Dubova and Volz (2016) (presented paper)

5
Effect of Advanced Economys Monetary Policy Stance: Japan as Example (1)

Shadow policy rate of Japan (Hattori, Lombardi and Zhu (in the making))
Methodology: application of dynamic factor model
Variables for the estimation
Interest rate variables
Call rate, JGB3M, JGB6M, JGB1Y, JGB2Y, JGB3Y, JGB5Y, JGB7Y, JGB10Y, JGB20Y
Monetary variables
M1, M2, M3, Broad liquidity
Bank of Japan balance sheet variables
Asset: Bills, JGB, Credit facilities, Loans
Liability: Bank notes, Reserves

6
Effect of Advanced Economys Monetary Policy Stance: Japan as Example (2)

Hattori, Lombardi and Zhu (in the making)

7
Effect of Advanced Economys Monetary Policy Stance: Japan as Example (3)

8
 Strong Spillover to Long-term Yields: Implication (1)

US Treasury 10 year yield

Source: CNBC

9
 Strong Spillover to Long-term Yields: Implication (2)

While calls have been made by Asian policy makers for greater international
monetary coordination to limit such spillovers (e.g., Rajan, 2014), the mandate for
achieving domestic economic targets for both the Fed and the ECB effectively limits
substantial international monetary cooperation to exceptional circumstances, such
as financial upheavals of a global scale. (page 34)

The implication is that Emerging Asian economies will have to continue learning to
live with such policy spillovers. (page 34)

10
 EAEs Available Measures: No 1 (1)

An answer is in the paper

11
Belke, Dubova and Volz (2016) (presented paper)
 EAEs Available Measures: No 1 (2)

An answer is in the paper.

However, short-term interest rates for some countries demonstrate small

variation over particular time periods, posing difficulties for empirical analysis
based on daily frequency data and, thus, on results reliability. (page 9)

Solid monetary policy to control the domestic yield curve up to as long maturity
spectrums as possible

12
 EAEs Available Measures: No 1 (3)
1) US 10-year Treasury bond yield

2) US 2-year Treasury bond yield

Make America Keynesian Again (2016.11.9) by Lars Christensen

13
 EAEs Available Measures: No 2

Another answer is in the paper

If central banks are constrained in their ability to control domestic long-term

interest rates, the whole arsenal of macroprudential policies has to be used to try
to control domestic credit creation and safeguard long-term financial stability.
(page 34)

14
Domestic Credit Creation Control: Reality (1)

Source: BIS
15
Domestic Credit Creation Control: Reality (2)

Source: BIS

16
Domestic Credit Creation Control: Reality (3)

Note: Sample countries are Australia, China, Hong Kong SAR, India, Indonesia, Japan, Korea,
Malaysia, New Zealand, the Philippines, Singapore and Thailand.
Schularick and Shim (2016) 17
Domestic Credit Creation Control: Reality (4)

Source: BIS

18
 Macroprudential Policy

Good reasons to consider value of changing policy weight toward less indebtedness
of the economy in the trade-off between higher level of economic activities in the
short-run and concerns in the medium-and-long run
Being so susceptive to changes in advanced economies financial conditions
Nonlinear indebtedness effect on growth (Cecchetti, Mohanty and Zampolli (2012),
Lombardi, Mohanty and Shim (unpublished transcript))

Recognition and good use of non-interest rate measures (Schularick and Shim
(2016))

Trials and learning on their own and learning from others (Sonoda and Sudo
(2016))
19
Thank you very much