The Fed’s Impact on Government Debt Interest – Impact of the Fed’s Interest Rate Decisions on Hungarian and other Emerging Market Sovereign Bond Yields

Abstract

Heavily indebted countries – such as Hungary with rapidly accumulating public debt during the 2000s – enjoy significant room for manoeuvre if they can save on their debt rate. On the other hand, the dependence of small, open economies on global economy renders their economic policy vulnerable. It has been observed in numerous areas that when the US “sneezes”, emerging economies “catch a cold”. Using a sample of eleven countries – including Hungary – this paper is intended to test, in a changed global economic environment, the repeatedly validated assumption that the Fed’s federal funds rate has an impact on the government debt rate of emerging economies. We use regression and causality analyses in the context of international interest rate transmission to study the determination. In addition to verifying the presence of interest rate transmission, we also found that the impact is different for different spatial and time horizons and it may even cease to exist in extreme circumstances.