Graduation Year

Fall 2011

Document Type

Campus Only Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics

Reader 1

Gregory Hess

Rights Information

© 2011 Caleb M. Davis

Abstract

This paper will attempt to explain fluctuations in emerging market interest rate spreads by examining the implied federal funds effective rates that are derived from federal funds interest rate futures contracts. It will focus on comparing the individual relationships between four widely-used measures of U.S. monetary policy and emerging market interest rate spreads to determine which is the most powerful. The four measures of U.S. monetary policy are as follows: the yield on the U.S. 10-year Treasury, federal funds effective rate, federal funds target rate, and the implied rate from one-month federal funds futures contracts. It will expand upon previous studies that have been conducted on this topic, namely that of which done by Vivek Arora and Martin Cerisola in 2000 that attempted to explain the relationship between U.S. monetary policy, measured by the federal funds effective rate, and emerging market interest rates spreads. I find that the yield on the U.S. 10-year Treasury to be the most powerful driver of changes in emerging market interest rate spreads. However, I also find that the implied rate from federal funds interest rate futures is still highly indicative of spreads, especially when compared to the target and effective federal funds rates.

Share

COinS