Determination Of Long-term Interest Rates Research Articles

An Inquiry Concerning Long-Term US Interest Rates Using Monthly Data

This paper undertakes an empirical inquiry concerning the determinants of long-term interest rates on US Treasury securities. It applies the bounds testing procedure to cointegration and error correction models within the autoregressive distributive lag (ARDL) framework, using monthly data and estimating a wide range of Keynesian models of long-term interest rates. While previous studies have mainly relied on quarterly data, the use of monthly data substantially expands the number of observations. This in turn enables the calibration of a wide range of models to test various hypotheses. The short-term interest rate is the key determinant of the longterm interest rate, while the rate of core inflation and the pace of economic activity also influence the long-term interest rate. A rise in the ratio of the federal fiscal balance (government net lending/borrowing as a share of nominal GDP) lowers yields on long-term US Treasury securities. The short- and long-run effects of short-term interest rates, the rate of inflation, the pace of economic activity, and the fiscal balance ratio on long-term interest rates on US Treasury securities are estimated. The findings reinforce Keynes’s prescient insights on the determinants of government bond yields.

What keeps long-term U.S. interest rates so low?

U.S. government indebtedness and fiscal deficits increased notably following the Global Financial Crisis. Yet long-term interest rates and U.S. Treasury yields have remained remarkably low. What keeps long-term interest rates so low? This paper relies on a simple model, based on John Maynard Keynes’ view that the central bank's actions are the key drivers of long-term interest rates, to explain the behavior of long-term interest rates in the U.S. The empirical findings confirm that short-term interest rates are the most important determinants of long-term interest rates in the U.S. Contrary to conventional wisdom, higher government indebtedness has a negative effect on long-term interest rates, particularly on a long run basis. However, in the short run, higher government indebtedness has a positive effect on long-term interest rates. These are relevant for contemporary policy debates and macroeconomic theory.

The Determinants of Long-term Interest Rates in Eurozone: Taylor Rule and Governance Indicators

<p>This study aims to search for the determinants of long-term interest rates in the Eurozone. Panel data analysis is employed for 14 Eurozone countries for the period of 2002-2014 to analyze the determinants of long-term interest rates. This study is carried out to find out whether the Worldwide Governance Indicators (WGI), Taylor (1993) rule and also the Eurozone crisis, as a control variable, have an impact on long-term interest rates. As WGI, Voice and Accountability, Political Stability and Absence of Violence/Terrorism, Government Effectiveness, Regulatory Quality, Rule of Law and Control of Corruption are used. The first finding of the empirical study is that inflation gap has an impact on long-term interest rates. Another finding of the study is that Political Stability and Absence of Violence/Terrorism, Government Effectiveness and Regulatory Quality effects long-term interest rates in 14 panel cross-sections. Besides, the analysis shows that the financial crisis in Eurozone as control variable affected long-term interest rates, as would be expected.</p>

The Empirics of Long-Term Us Interest Rates

US government indebtedness and fiscal deficits increased notably following the global financial crisis. Yet long-term interest rates and US Treasury yields have remained remarkably low. Why have long-term interest rates stayed low despite the elevated government indebtedness? What are the drivers of long-term interest rates in the United States? John Maynard Keynes holds that the central bank’s actions are the main determinants of long-term interest rates. A simple model is presented where the central bank’s actions are the key drivers of long-term interest rates through short-term interest rates and various monetary policy measures. The empirical findings reveal that short-term interest rates, after controlling for other crucial variables such as the rate of inflation, the rate of economic activity, fiscal deficits, government debts, and so forth, are the most important determinants of long-term interest rates in the United States. Public finance variables, such as government fiscal balances or government indebtedness, as a share of nominal GDP appear not to have any discernible effect on long-term interest rates.

A Keynesian explanation of Indian government bond yields

John Maynard Keynes held that the central bank’s actions mainly determine long-term interest rates through short-term interest rates and various monetary policy measures. His conjectures about the determinants of long-term interest rates were made in the context of advanced capitalist economies and were based on his views on liquidity preference, ontological uncertainty, and the formation of investors’ expectations. Is Keynes’s conjecture that the central bank’s action is the main driver of long-term interest rates valid in emerging markets, such as India? This paper empirically investigates the determinants of changes in Indian government bonds’ nominal yields. Changes in short-term interest rates, after controlling for other crucial variables, such as changes in the rate of inflation and the rate of economic activity, take a lead role in driving the changes of the nominal yields of Indian government bonds. This suggests that Keynes’s views on long-term interest rates can also be applicable to emerging markets. The empirical findings reveal that higher fiscal deficits do not appear to exert upward pressures on government bond yields in India.

Does Keynesian Theory Explain Indian Government Bond Yields?

John Maynard Keynes held that the central bank’s actions determine long-term interest rates through short-term interest rates and various monetary policy measures. His conjectures about the determinants of long-term interest rates were made in the context of advanced capitalist economies, and were based on his views on ontological uncertainty and the formation of investors’ expectations. Are these conjectures valid in emerging markets, such as India? This paper empirically investigates the determinants of changes in Indian government bonds’ nominal yields. Changes in short-term interest rates, after controlling for other crucial variables such as changes in the rates of inflation and economic activity, take a lead role in driving changes in the nominal yields of Indian government bonds. This vindicates Keynes’s theories, and suggests that his views on long-term interest rates are also applicable to emerging markets. Higher fiscal deficits do not appear to raise government bond yields in India. It is further argued that Keynes’s conjectures about investors’ outlooks, views, and expectations are fairly robust in a world of ontological uncertainty.

Determinants Of Long-Term Interest Rates In The United States

The behavior of the long-term interest rates is a practical problem for private and public organizations. Organizations need to estimate interest rates for purposes of assigning value to long-term obligations such as defined benefit plans and long-term leases and making decisions related to long term capital purchases. The purpose of this study was to analyze the determinants of long-term interest rates in the United States, using 352 quarterly time series data points extending from 1999 to 2009. This study examines how a change in overnight interest rates, budget deficit, Gross Domestic Product (GDP), inflation, and net capital inflow impact on long-term interest rates, which is the 30-year U.S. Treasury constant securities rate. We find that the variables (overnight interest rates, expected inflation, budget deficit, foreign capital inflow, and GDP) have statistically significant impact on long-term interest rates in the United States; all variables jointly explain changes in the long-term interest rates. The findings of this study can assist organization as they assign values to long-term obligations and assets.

Determinants of Long-Term Interest Rates in the United States and the Euro Area: A Multivariate Approach

This article looks at the factors explaining the level of US and European long-term interest rates between 1986 and 2005. We begin by selecting the structural determinants of long-term interest rates, dealing with the US and European cases separately. However, a univariate framework cannot capture market integration and suffers from a number of statistical limitations. Switching to a multivariate setting reveals spillover from US to euro area long-term yields, with no reciprocal effect. The model allows us to draw up a timeline of events affecting the level of US and European long-term interest rates. Accordingly, the bursting of the internet bubble, purchases by foreign agents, both official and private, and the increase in global liquidity all seemingly exerted downward pressure on US long-term interest rates and, indirectly, on euro area long rates.

Where Have the Monetary Surprises Gone? the Effects of FOMC Statements

This paper examines the impact of central bank communication on market expectations of monetary policy and long-term interest rates by comparing Federal Open Market Committee (FOMC) action dates when a policy statement was made to dates before statements were issued. Increased communication has been associated with a reduction in the magnitude of short-term monetary surprises; a greater flow of information about the long-term path of policy that is distinct from the short-term surprise; and a larger role for these long-term surprises in the determination of long-term interest rates.

Do short-term interest rates influence long-term interest rates? Empirical evidence from some EMS countries

This paper attempts to evaluate the possible influence of short-term interest rates on the determination of long-term interest rates for some EMS countries. In particular, we discuss a way of reconciling the widely dominant term-structure approach to interest rates with the conditions imposed by the market practice of financing high proportions of securities portfolios at money market rates. To that end, we apply the cointegration analysis to daily data.

Long-Term Interest Rates in the United States: An Empirical Analysis

Some new empirical evidence on the determination of long-term interest rates in the United States is presented. The empirical results generally support the view that fiscal deficits raise real long-term interest rates. The paper also discusses both theoretical considerations and other empirical evidence that suggest that neither the response of private saving nor international capital mobility has prevented budget deficits from raising interest rates.

The Determination of Long-Term Interest Rates: Implications for Fiscal and Monetary Policies

THE YIELDS AND PRICES of long-term assets play an important role in the complex interrelationships that connect financial and nonfinancial behavior in an economy like that of the United States. Long-term interest rates are a major component of the cost of financial capital to corporate borrowers and, consequently, a key determinant of physical capital formation through business investment in new plant and equipment. Long-term interest rates may also affect other typically debt-financed physical investments like residential construction, although the evidence there is less straightforward. Equity yields constitute another large component of the cost of corporate financial capital, and hence another determinant of business investment. Movements in equity prices (and, to a lesser extent, bond prices) also account for much of the variation in households' overall wealth positions and thereby importantly influence consumer spending. In sum, long-term asset yields and prices are a large part of the story of how what happens in the financial markets including monetary policy and the financial aspects of fiscal policy affects the nonfinancial economy. In light of the importance of long-term asset yields and prices even in a nonfinan-

The Role of Commercial Banks' Portfolio Behavior in the Determination of Treasury Security Yields: Comment

In this paper, Benjamin Friedman applies his structural-sectoral model of the determination of long-term interest rates to investigate whether his approach and empirical results have a significant bearing on the estimated time path by which the American economy responds to some standard types of monetary and fiscal policy actions. He endeavors to answer this question by a skillful utilization of the MPS model. He accepts the entire structure of that model including the basic hypothesis that the short-term interest rate is determined by the interaction between the money supply and aggregate output. However, he replaces the term-structure equation which, in that model, determines the long-term corporate bond rate by his structuralsectoral model. I must note at the outset my basic sympathy with the approach of Friedman and of his school, represented at this conference by Vance Roley, to the determination of the long-term rate, or more precisely, of the spread between the short-term and the long-term rate. I am, of course, deeply committed to the habitat hypothesis that is, to the hypothesis that participants in the bond market have well-defined preferences as to the term for which they wish to lend or borrow . Under uncertainty and risk aversion, these preferences imply that the interest rate for any given maturity may differ from the value implied by the expected paths of the future short rate, by positive or negative risk premia. Friedman's model in essence hypothesizes that the various sectors that he models both on the demand and the supply side of the bond market may be characterized by different habitats (as well as possibly risk aversion) and that accordingly a redistribution of the aggregate flow of demand and supply between different transactors may result in a change in the risk premia. Differences in expectations, as well as differential speeds of adjustments of portfolios to their long-run equilibrium structure, may further contribute in the short run to make risk premia respond to the way in which investable funds happen to be distributed among sectors. I do, however, have some qualms about the implementation of this approach. His

Financial Flow Variables and the Short-Run Determination of Long-Term Interest Rates

Because transactions costs are smaller for allocating new cash flows than for reallocating existing asset holdings, financial flow variables are important determinants of investors' short-run asset demands. The demand-for-bonds equations implied by the resulting marginal model of portfolio behavior constitute the demand side of a structural supply-demand model of the determination of the long-term interest rate. Empirical results, based on demand-for-bonds equations estimated using U.S. data for six major categories of bond market investors, support the optimal marginal adjustment model and show that the associated structural model of interest rate determination, which is restricted by the underlying demand-for-bonds equations, fits the data about as well as do previously developed unrestricted reduced-form term-structure equations.