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International capital flows and U.S. interest rates

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  • Francis E. Warnock
  • Veronica C. Warnock
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    Abstract

    Foreign flows have an economically large and statistically significant impact on long-term interest rates. Controlling for various macroeconomic factors we estimate that had there been no foreign flows into U.S. bonds over the past year, the 10-year Treasury yield would currently be 150 basis points higher; even a step-down to average inflows would imply an increase of 105 basis points. The impact of the headline-making foreign official flows—a relatively small subset of total foreign accumulation of U.S. bonds—is also significant but markedly smaller. Our results are robust to a number of alternative specifications.

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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 840.

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    Date of creation: 2005
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    Handle: RePEc:fip:fedgif:840

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    Keywords: Capital movements ; Interest rates;

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    Cited by:
    1. Hume, Michael & Sentance, Andrew, 2009. "The global credit boom: challenges for macroeconomics and policy," Discussion Papers 27, Monetary Policy Committee Unit, Bank of England.
    2. Glenn D. Rudebusch & Eric T. Swanson & Tao Wu, 2006. "The Bond Yield "Conundrum" from a Macro-Finance Perspective," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 24(S1), pages 83-109, December.
    3. Bandholz, Harm & Clostermann, Jörg & Seitz, Franz, 2007. "Explaining the US bond yield conundrum," OTH im Dialog: Weidener Diskussionspapiere 2, University of Applied Sciences Amberg-Weiden (OTH).
    4. Philip R. Lane & Gian Maria Milesi-Ferretti, 2006. "The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities,1970–2004," The Institute for International Integration Studies Discussion Paper Series iiisdp126, IIIS.
    5. Guy Meredith, 2007. "Debt Dynamics and Global Imbalances: Some Conventional Views Reconsidered," IMF Working Papers 07/4, International Monetary Fund.
    6. Sharon Kozicki & Gordon Sellon, 2005. "Longer-term perspectives on the yield curve and monetary policy," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 5-33.
    7. Francis E. Warnock, 2006. "How Might a Disorderly Resolution of Global Imbalances Affect Global Wealth?," IMF Working Papers 06/170, International Monetary Fund.
    8. Kenneth S. Rogoff, 2006. "Impact of globalization on monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 265-305.
    9. Yash P. Mehra, 2006. "Inflation uncertainty and the recent low level of the long bond rate," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 225-253.
    10. Caroline Freund & Frank Warnock, 2005. "Current Account Deficits in Industrial Countries: The Bigger They are, the Harder They Fall?," NBER Working Papers 11823, National Bureau of Economic Research, Inc.
    11. Bank for International Settlements, 2008. "FX reserve management: trends and challenges," BIS Papers, Bank for International Settlements, number 40, 3.
    12. Maria Teresa Punzi & W. Christopher Walker, 2007. "Financing of Global Imbalances," IMF Working Papers 07/177, International Monetary Fund.
    13. Manmohan S. Kumar & David Hauner, 2006. "Fiscal Policy and Interest Rates--How Sustainable Is the "New Economy"?," IMF Working Papers 06/112, International Monetary Fund.

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