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.     

Economy as Instituted Process: Change,Transformation, and Progress

During the past two decades, chronic fiscal deficits have led to elevated and rising ratios of government debt to nominal GDP in Japan. Nevertheless, long-term Japanese government bonds' (JGBs) nominal yields initially declined, and have since stayed remarkably low and stable. This is contrary to the received wisdom which holds that higher government deficits and indebtedness will exert upward pressures on nominal yields. This paper examines the relationship between JGBs' nominal yields and short-term interest rates, as well as other factors, such as low inflation, persistent deflationary pressures, and tepid growth. We also argue that Japan has monetary sovereignty, which gives the Japanese government the ability to service its debt, and enables the Bank of Japan (BOJ) to keep JGBs' nominal yields low by ensuring that short-term interest rates are low, and by using various other tools of monetary policy. The argument that short-term interest rates and monetary policy are the primarily drivers of long-term interest rates follows John Maynard Keynes's (1930) insights.     

The tax-rate induced bond substitution hypothesis and the traditional textbook treatment of the relationship between tax-free and taxable bond yields

ABSTRACT

This empirical study posits and tests the ‘tax-rate induced bond substitution hypothesis,’ wherein the propensity for bond buyers to substitute tax-exempt municipal bonds for taxable bonds in their portfolios is hypothesized to be an increasing function of the maximum federal personal income tax rate. This substitution acts to elevate the real interest rate yield on taxable bonds while diminishing it on tax-exempt bonds, ceteris paribus. Two measures of real interest rates are included in the present analysis, ex post real interest rate and ex ante real interest rate. Empirical estimations for the 1981–2018 period provide strong support for the hypothesis. They reveal that the real interest rate yield on high-grade tax-exempt municipal bonds is a decreasing function of the maximum marginal federal personal income tax, whereas the real interest rate yield on taxable ten-year Treasury notes is an increasing function of that same tax rate. We examine the implications of this study and the information underlying it for the traditional formulaic textbook treatment of the relationship between yields on bonds whose interest rate payments are taxable versus those whose interest rate payments are tax exempt and find it is not as dependable as the textbooks would have us believe.     

A nonparametric method for term structure fitting with automatic smoothing

We present a nonparametric method for fitting the term structure of interest rates from bond prices. Our method is a variant of the smoothing spline approach, but within our framework we are able to determine the smoothing coefficient automatically from data using the generalized cross-validation or maximum likelihood estimates. We present an effective numerical algorithm to simultaneously find the term structure and the optimal smoothing coefficient. Finally, we compare the proposed nonparametric fitting method with other parametric and nonparametric methods to find its superior performance. We find that existing term structure fitting methods perform well in liquid markets while illiquid markets present new challenges, which we address in this article.     

Nonparametric estimation of convergence of interest rates: Effects on bond pricing

We present and estimate a model of short term interest rate dynamics where we incorporate the convergent behavior of interest rates implied by the transition to EMU. We apply this model to data of two EMU countries - Spain and Italy - and compare the performance, in terms of accuracy of bond pricing, of this two-factor convergence model with alternative specifications. Nonparametric techniques are used for the estimation of the processes. The two-factor model which accounts for the convergence with Europe of the domestic economies, obtains better results, especially for short-term assets, than alternative models. The results of the nonparametric specifications are shown to be significantly better than those of parametric alternatives.JEL Classification: E43, C14We would like to thank Adrian Pagan and Eduardo Schwartz for their invaluable feedback, encouragement and patience. We also would like to thank the editor, two anonymous referees and participants at the Symposium of Economic Analysis (Barcelona, December 1999), the Australasian Meeting of the Econometric Society (Sydney, July 1999), the 2000 European Meeting of the Financial Management Association (Edinburgh, July 2000) and seminars at the Australian National University, Canberra, and at the University of New South Wales, Sydney, for their comments and suggestions. All errors remain our sole responsibility. Financial assistance from the Fundación Ramó n Areces, Madrid, Spain, and the Asociación de Amigos de la Universidad de Navarra, Pamplona, Spain, is gratefully acknowledged.     

Modelling European sovereign bond yields with international portfolio effects

This paper proposes a portfolio choice model with two countries to evaluate the specific role of volatility and co-volatility risks in the formation of long-term European interest rates over the crisis and post-crisis periods with an active role of the European Central Bank. Long-term equilibrium rates depend crucially on the covariances between international bond yields anticipated by investors. Positively anticipated covariances amplify the phenomena of fundamental contagions related to the degradations of public finance and solvency of sovereign debt issuer, while negatively anticipated covariances amplify the phenomena of Flight-to-quality. The two-step econometric approach over the period January 2006 to September 2016 analyses 21 European market pairs in a bivariate GARCH framework. Empirical results show that the decline in German and French long-term rates from March 2011 is partially due to the decrease in both risk premium and covariances with periphery countries. These declines actually amplify the mechanisms of Flight-to-quality. Finally, a lower sensitivity of rate to volatility and co-volatility risks during the crisis period gives credit to the hypothesis of a occasional fragmentation of the European sovereign bond markets (De Santis and Stein, 2016, Ehrmann and Fratzscher, 2017).     

Impact of the Asset Purchase Programme on euro area government bond yields using market news

Assessing the impact on sovereign yields of the euro area Asset Purchase Programme (APP) is challenging, because the monetary policy announcement in January 2015 was already implicitly communicated to the market in the second half of 2014. To identify the APP effect, we construct an index which computes the intensity of this discussion in Bloomberg. The econometric results, which are based on real time vintages, suggest that the so-called stock effect with purchases worth about 10% of GDP reduced the GDP-weighted 10-year euro area sovereign yield by 72 basis points, which is equivalent to effects estimated for US and UK programmes, and much larger than those suggested by event studies for the euro area.     

A new test for fiscal sustainability with endogenous sovereign bond yields: Evidence for EU economies

In this paper we develop a new test for fiscal sustainability and propose a synthetic fiscal sustainability indicator. Conventional tests based on fiscal reaction functions assume a constant real interest rate. However, many empirical studies find evidence on a positive response of long-term rates to sovereign debt levels. We take this evidence into account and endogenize the long-term real interest rate in testing fiscal sustainability. We apply the new test for the European economies. We find that considering the response of interest rate to debt may change the assessment of fiscal sustainability. More specifically, our results indicate that fiscal sustainability is at risk in a number of European Union economies, even if the results of traditional approaches suggest sustainable fiscal policy.     

The effects of monetary policy changes on market interest rates in Greece: An event study approach

The operational procedures of the Bank of Greece underwent major changes during the 1990s. These shifts in operational strategy made interest rates the main tool of monetary policy for the first time in Greece. This paper examines the effects of changes in the bank's operational interest rates on market interest rates at eight maturities and for different operational regimes. A major feature of our study is the application of the event study methodology used in finance, which has not been employed in any previous study on this subject. We find that changes in official interest rates had a significant influence on short-term and intermediate-term rates and that this relationship was affected by the changes in the bank's operational procedure.     

The Myth of Market Neutrality: A Comparative Study of the European Central Bank’s and the Swiss National Bank’s Corporate Security Purchases

ABSTRACT

Monetary policy operations in corporate security markets confront central banks with choices that are traditionally perceived to be the prerogative of governments. This article investigates how central bankers legitimise corporate security purchases through a comparative study of the European Central Bank (ECB) and the Swiss National Bank (SNB). As we show, central bankers downplay the novelty of corporate security purchases by relying on familiar pre-crisis justifications of Central Bank Independence. Citing an ideal of ‘market neutrality’, central banks present corporate security purchases as pursuing a narrow objective of price stability and obfuscate their distributive consequences. In this way, central bankers depoliticise corporate security purchases: they reduce the potential for choice, collective agency, and deliberation concerning both the pursuit of corporate security purchases and the choices made in implementing these policies. We also describe the undesirable democratic, social and environmental dimensions of these practices, which we propose to address through enhanced democratic accountability.     

Post Keynesian endogenous money theory: A theoretical and empirical investigation of the credit demand schedule

The article investigates the relationship between interest rates and loan amounts provided by commercial banks from both a theoretical and an empirical perspective. Theoretically, some scholars belonging to the post Keynesian endogenous money tradition advocate that a decrease (increase) in interest rates leads to a positive (negative) effect on the amount of loans demanded by households and firms. On the other hand, some heterodox economists maintain that interest rates do not stimulate firms’ credit demand but that a certain degree of influence is allowed for loans provided to households. By applying a vector autoregression (VAR) and vector error-correction model (VECM) methodology to European Central Bank and Organisation for Economic Co-operation and Development data for the eurozone, this article proposes an empirical validation of such theoretical premises by analysing the relationship between the different types of credit provided by commercial banks and the corresponding interest rates. The main results show a negative relationship between the interest rates and the credit provided for the purchase of houses. Conversely, no significant relationship is found between loans granted to enterprises and loans for the purchase of consumption goods and the corresponding interest rates.     

我国国债利率期限结构的静态实证分析

选取我国银行间国债某个交易日的数据,比较了三次样条模型、指数样条模型和NSS模型对国债价格的拟合效果,结果发现三次样条模型拟合效果最好;使用三次样条模型构建我国国债收益率曲线,并对其静态特征与形成原因做了分析;静态分析中显示我国国债长短期利差太低,并提出相关的政策建议。     

The cross section of international government bond returns

Volatility risk, credit risk, value effect, and momentum are major return drivers in the fixed-income universe. This study offers a four-factor pricing model for international government bonds. The model thoroughly explains the variation of government bond returns and covers a range of more than 60 cross-sectional return patterns in government bond markets, verifying its usefulness for asset pricing. The research was conducted within a sample of bonds from 25 developed and emerging markets for the years 1992 to 2016.     

The expectations hypothesis of the term structure of interest rates: The Brazilian case revisited

This article tests the Expectations Hypothesis (EH) using Brazilian monthly data for bond yields spanning the 2000–2017 sample period and ranging in maturity from 3 months to 5 years. Three tests are examined: the first is based on interest rates spread and the other two are based on the forward rates. On balance our results suggest rejection of the EH throughout the maturity spectrum examined, and are broadly consistent with previous findings that a linear combination of forward rates provides a statistically significant prediction of bond excess returns.     

Other financial institutions' portfolio behaviour and policy implications: A study of India

Abstract

Applied literature has largely neglected the asset decision of other financial institutions (OFIs), though it may possess important policy implications. In this paper, portfolio behaviour of OFIs in India is modelled by using the annual flow of funds data for 1951/52 to 1993/94. The long-run model of the Almost Ideal Demand System and the allied concepts of cointegration generated economically and statistically plausible results. We find a strong influence of interest rates on portfolio behavior, thereby the role of interest rates on resource allocation. The paper concludes that the macroeconomic management through monetary policy actions may not be unnecessarily limited through the channel of OFIs in the post-financial reform regime in India.     

Indian remote sensing program: A national system of innovation?

When India launched the satellite IRS 1C in 1995 with a resolution of 6 m, it had the distinction of having the highest spatial resolution among all operational civilian remote sensing satellites in the world at that time. This world-class technological capability in remote sensing was a result of favourable organisational and institutional factors that nurtured innovation. There was a domestic need for remote sensing information for managing natural resources like land, water and forests. Since India is still largely agriculture and natural resources dominated economy, a generic technology that could be used in many sectors related to natural resources has the potential to accelerate the economic development process. This paper looks at the link between an organisational innovation that creates a world-class capability that meets a domestic need and ability of this innovation to change the larger national system. It tries to identify institutional factors that seem to inhibit innovation and suggests approaches that can create a suitable national climate for the rapid diffusion of innovation.     

Fiscal policy,government debt,and economic growth in the Kaleckian model of growth and distribution

This article presents the Kaleckian model of growth and distribution that sets a budget deficit ratio as an indicator of fiscal policy and examines the short- and long-run effects of an increase in budget deficits and a rise in income tax rates on the economy. The key short-run outcomes are as follows. First, expanded budget deficits have a positive effect on the rate of capacity utilization. Second, the tax rate for wage income does not affect the rate of capacity utilization, whereas the tax rate for capital income has a favorable impact on it. This result implies that raising the tax rate for capital income can be an important policy instrument for stimulating the economy. Third, we find that the economy exhibits a wage-led aggregate demand in the short run. The main long-run results are as follows. First, the effect of expanded budget deficits on the growth rate is ambiguous, since a higher debt burden negatively influences the rate of capacity utilization and hence economic growth, despite the increase in demand caused by government borrowing. A higher budget deficit ratio thus raises the growth rate only if a certain condition is satisfied. Second, the tax rate for capital income has a positive impact on the growth rate. Third, the economy shows a wage-led growth in the long run.     

中央银行分支机构设置的国际比较

中央银行在货币经济理论当中的地位相当重要,而其分支机构的设置则更多地是一个实践问题。本文以英、美及欧元区中央银行的发展历史与近期变化为考察对象,从分支机构的设立方式、组织定位、功能与角色三个方面研究其成功的理念和做法,以期对我国的中央银行体制改革提供有益的启示。     

The role of uncertainty in the term structure of interest rates: A GARCH-ATSM approach

This article examines the roles of uncertainties regarding various macro-variables in determining risk premiums of bond yields. We develop a multivariate GARCH-VAR to quantify uncertainties regarding inflation, real activities and monetary policy as time-varying conditional variances. We jointly estimate the multivariate GARCH and no-arbitrage bond pricing equations using a maximum likelihood method. The results indicate that the inflation uncertainty is the largest contributor to the dynamics of long-term yields since the 1980s, while the monetary policy uncertainty also plays noticeable roles.     

新古典生产函数的质疑与货币量值的生产函数

新古典理论以生产函数和效用函数为基础,建立了技术关系的稀缺资源有效配置理论,其核心是表明商品和要素稀缺性的相对价格.生产函数在微观尚可应用,但并不能用于解释总量经济和经济增长与波动问题.尤其是总供给完全取决于实物生产函数的投入产出关系,这与总需求分析所采用的货币支出是不协调的.货币量值的生产函数的推导表明,总供给只是企业的货币成本函数而不联系到技术上的投入产出关系,而所有的国民收入核算中的货币量值都只是表明人们经济关系的名义变量而与实物的技术关系或生产函数是完全无关的.