Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/273874 
Year of Publication: 
2022
Series/Report no.: 
Working Paper No. 1012
Publisher: 
Levy Economics Institute of Bard College, Annandale-on-Hudson, NY
Abstract: 
John Maynard Keynes argued that the central bank influences the long-term interest rate through the effect of its policy rate on the short-term interest rate. However, Keynes's claim was confined to the behavior of the long-term government bond yield. This paper investigates whether Keynes's claim holds for the yields of spread products and over-the-counter financial derivatives by econometrically modeling the dynamics of the pound sterling-denominated longterm interest rate swap yield. It uses the generalized autoregressive conditional heteroskedasticity (GARCH) modeling approach to examine the relationship between the month-over-month changes in the short-term swap yield and the month-over-month change in the long-term swap yield, while controlling for several key macroeconomic and financial variables. The month-overmonth change in the short-term interest rate has a positive and statistically significant effect on the month-over-month change in the long-term swap yield. This finding reinforces Keynes's conjecture concerning the central bank's influence over the long-term interest rate. The investigation's empirical findings and their policy implications are discussed from a Keynesian perspective.
Subjects: 
Interest Rate Swaps
Swap Yields
Interest Rates
Bank of England
John Maynard Keynes
JEL: 
E43
E50
E58
E60
G10
G12
Document Type: 
Working Paper

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