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Interest Rate Conundrum

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Author Info

  • Craine Roger

    ()
    (University of California, Berkeley)

  • Martin Vance L

    ()
    (University of Melbourne)

Abstract

In June of 2004 the Fed began relentlessly tightening policy. They raised the Federal Funds Target (Target) from 1% to 5 1/4% in 1/4% increments at seventeen consecutive meetings. While short rates dutifully followed the Target up, long maturity rates actually fell. Alan Greenspan in 2005 Congressional testimony labeled the strange behavior of the spread between long rates and the Target a "conundrum." This paper examines the conundrum. We present robust empirical evidence that the increase in foreign holdings of U.S. Treasury bonds explains at least half of the decline in long maturity rates. Foreign holdings of U.S. Treasury debt with a maturity over one year grew from 20% in 1994 to 57% in 2007.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 9 (2009)
Issue (Month): 1 (March)
Pages: 1-29

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Handle: RePEc:bpj:bejmac:v:9:y:2009:i:1:n:8

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Cited by:
  1. Eduardo Fernández-Arias & Peter J. Montiel, 2009. "Crisis Response in Latin America: Is the "Rainy Day" at Hand?," IDB Publications 6769, Inter-American Development Bank.
  2. Byrne, Joseph P. & Fazio, Giorgio & Fiess, Norbert, 2012. "Interest rate co-movements, global factors and the long end of the term spread," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 183-192.
  3. Pietro Catte & Pietro Cova & Patrizio Pagano & Ignazio Visco, 2010. "The role of macroeconomic policies in the global crisis," Questioni di Economia e Finanza (Occasional Papers) 69, Bank of Italy, Economic Research and International Relations Area.
  4. Barry Eichengreen, 2010. "Globalization and the Crisis by Barry Eichengreen," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 11(3), pages 20-24, October.
  5. Arvind Subramanian, 2011. "Renminbi Rules: The Conditional Imminence of the Reserve Currency Transition," Working Paper Series WP11-14, Peterson Institute for International Economics.
  6. Goda, Thomas & Lysandrou, Photis & Stewart, Chris, 2013. "The contribution of US bond demand to the US bond yield conundrum of 2004–2007: An empirical investigation," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 27(C), pages 113-136.

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