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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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    Related research

    Keywords: Capital movements ; Interest rates;

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    Citations

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    Cited by:
    1. 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.
    2. 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.
    3. Hume, Michael & Sentance, Andrew, 2009. "The global credit boom: challenges for macroeconomics and policy," Discussion Papers 27, Monetary Policy Committee Unit, Bank of England.
    4. Francis E. Warnock, 2006. "How Might a Disorderly Resolution of Global Imbalances Affect Global Wealth?," IMF Working Papers 06/170, International Monetary Fund.
    5. Bank for International Settlements, 2008. "FX reserve management: trends and challenges," BIS Papers, Bank for International Settlements, number 40, May.
    6. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2006. "The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970-2004," CEPR Discussion Papers 5644, C.E.P.R. Discussion Papers.
    7. Harm Bandholz & Jorg Clostermann & Franz Seitz, 2009. "Explaining the US bond yield conundrum," Applied Financial Economics, Taylor & Francis Journals, vol. 19(7), pages 539-550.
    8. Manmohan S. Kumar & David Hauner, 2006. "Fiscal Policy and Interest Rates," IMF Working Papers 06/112, International Monetary Fund.
    9. Glenn D. Rudebusch & Eric T. Swanson & Tao Wu, 2006. "The bond yield "conundrum" from a macro-finance perspective," Working Paper Series 2006-16, Federal Reserve Bank of San Francisco.
    10. Maria Teresa Punzi & W. Christopher Walker, 2007. "Financing of Global Imbalances," IMF Working Papers 07/177, International Monetary Fund.
    11. Philip R. Lane & Gian-Maria Milesi-Ferretti, 2006. "The External Wealth of Nations Mark II," IMF Working Papers 06/69, International Monetary Fund.
    12. Guy Meredith, 2007. "Debt Dynamics and Global Imbalances," IMF Working Papers 07/4, International Monetary Fund.
    13. 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.
    14. 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.

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