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

Author

Listed:
  • Tanweer Akram
  • Huiqing Li
Abstract
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 long-term 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.

Suggested Citation

  • Tanweer Akram & Huiqing Li, 2017. "An Inquiry Concerning Long-term US Interest Rates Using Monthly Data," Economics Working Paper Archive wp_894, Levy Economics Institute.
    • Handle: RePEc:lev:wrkpap:wp_894
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    References listed on IDEAS

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    Cited by:

    1. Tanweer Akram, 2019. "Prospects and Risks for the Global Economy in 2019," CPD Working Paper 130, Centre for Policy Dialogue (CPD).
    2. Scott Fullwiler, 2020. "When the Interest Rate on the National Debt Is a Policy Variable (and “Printing Money” Does Not Apply)," Public Budgeting & Finance, Wiley Blackwell, vol. 40(3), pages 72-94, September.

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    More about this item

    Keywords

    Government Bond Yields; Long-term Interest Rates; Short-term Interest Rates; Monetary Policy; Central Bank; John Maynard Keynes;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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