Term Premium Spillovers from the US to International Markets

This paper investigates how a rise in US long-term interest rates would have an effect on other international markets. We document that a significant portion of long-term interest rates is due to term premium, which can be interpreted as compensation for inflation risk. Based on an assumed interest rate shock of a 200-basis-point increase in the US term premium, we find that most economies experience a stronger response to an interest rate shock of the same magnitude following the taper tantrum episode in May 2013. A fixed-effect panel data regression analysis suggests that country specific fundamentals such as financial integration and inflation are crucial determinants of their response