Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/173503
Authors: 
Akram, Tanweer
Li, Huiqing
Year of Publication: 
2017
Series/Report no.: 
Working Paper, Levy Economics Institute 894
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.
Subjects: 
Government Bond Yields
Long-term Interest Rates
Short-term Interest Rates
Monetary Policy
Central Bank
John Maynard Keynes
JEL: 
E43
E50
E58
E60
G10
G12
Document Type: 
Working Paper

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