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The interest rate effects of government debt maturity

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  • Jagjit S Chadha
  • Philip Turner
  • Fabrizio Zampolli

Abstract

Federal Reserve purchases of bonds in recent years have meant that a smaller proportion of long-dated government debt has had to be held by other investors (private sector and foreign official institutions). But the US Treasury has been lengthening the maturity of its issuance at the same time. This paper reports estimates of the impact of these policies on long-term rates using an empirical model that builds on Laubach (2009). Lowering the average maturity of US Treasury debt held outside the Federal Reserve by one year is estimated to reduce the five-year forward 10-year yield by between 130 and 150 basis points. Such estimates assume that the decisions of debt managers are largely exogenous to cyclical interest rate developments; but they could be biased upwards if the issuance policies of debt managers are not exogenous but instead respond to interest rates. Central banks will face uncertainty not only about the true magnitude of maturity effects, but also about the size and concentration of interest rate risk exposures in the financial system. Nor do they know what the fiscal authorities and their debt managers will do as long-term rates change.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 415.

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Length: 52 pages
Date of creation: Jun 2013
Date of revision:
Handle: RePEc:bis:biswps:415

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Related research

Keywords: quantitative easing; sovereign debt management; long-term interest rate; portfolio balance effect;

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References

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  16. Athanasios Orphanides, 2003. "Historical monetary policy analysis and the Taylor rule," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2003-36, Board of Governors of the Federal Reserve System (U.S.).
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Citations

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Cited by:
  1. Philip Turner, 2014. "The global long-term interest rate, financial risks and policy choices in EMEs," BIS Working Papers, Bank for International Settlements 441, Bank for International Settlements.
  2. Philip Turner, 2014. "The exit from non-conventional monetary policy: what challenges?," BIS Working Papers, Bank for International Settlements 448, Bank for International Settlements.
  3. Marco Jacopo Lombardi & Feng Zhu, 2014. "A shadow policy rate to calibrate US monetary policy at the zero lower bound," BIS Working Papers, Bank for International Settlements 452, Bank for International Settlements.
  4. Jagjit S. Chadha & Philip Turner & Fabrizio Zampolli, 2013. "The Ties that Bind: Monetary Policy and Government Debt Management," Studies in Economics, Department of Economics, University of Kent 1318, Department of Economics, University of Kent.

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