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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. 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.
    2. Harm Bandholz & Jorg Clostermann & Franz Seitz, 2009. "Explaining the US bond yield conundrum," Applied Financial Economics, Taylor and Francis Journals, vol. 19(7), pages 539-550.
    3. 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.
    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, March.
    6. Hume, Michael & Sentance, Andrew, 2009. "The global credit boom: Challenges for macroeconomics and policy," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1426-1461, December.
    7. 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.
    8. Guy Meredith, 2007. "Debt Dynamics and Global Imbalances: Some Conventional Views Reconsidered," IMF Working Papers 07/4, International Monetary Fund.
    9. 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.
    10. Maria Teresa Punzi & W. Christopher Walker, 2007. "Financing of Global Imbalances," IMF Working Papers 07/177, International Monetary Fund.
    11. Kenneth S. Rogoff, 2006. "Impact of globalization on monetary policy," Proceedings, Federal Reserve Bank of Kansas City, pages 265-305.
    12. 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.
    13. 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.

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