The Transmission of Euro Area Interest Rate Shocks to Asia -- Do Effects Differ When Nominal Interest Rates are Negative?

This paper proposes a non-linear factor-augmented vector autoregressive model to evaluate spillovers to Asia from an unexpected rate cut in the euro area. We focus on potential asymmetries in the transmission of the shock that could arise due to prevailing negative interest rates in the euro area. Our findings indicate significant and negative effects on short-and long-term interest rates throughout selected Asian economies. While the cross-country impact on yields is quite homogeneous when the policy rate in the euro area is positive, large heterogeneity emerges when the shock occurs under a negative interest rate environment in the euro area. For several countries, the effects on Asian long-term yields are stronger, this implies that not only relative yield differentials play a role for international investors but also the absolute yield level. In this sense, negative interest rate policies can act as an amplifier of international portfolio rebalancing.