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International Capital Flows and U.S. Interest Rates

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Author Info
Francis E. Warnock
Veronica Cacdac Warnock
Abstract

Foreign official purchases of U.S. government bonds have an economically large and statistically significant impact on long-term interest rates. Federal Reserve credibility, as evidenced by dramatic reductions in both long-term inflation expectations and the volatility of long rates, contributed much to the decline of long rates in the 1990s. More recently, however, foreign flows have become important. Controlling for various factors given by a standard macroeconomic model, we estimate that had there been no foreign official flows into U.S. government bonds over the past year, the 10-year Treasury yield would currently be 90 basis points higher. Our results are robust to a number of alternative specifications.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12560.

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Date of creation: Oct 2006
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Handle: RePEc:nbr:nberwo:12560

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Find related papers by JEL classification:
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Marcel Fratzscher & Luciana Juvenal & Lucio Sarno, 2007. "Asset prices, exchange rates and the current account," Working Paper Series 790, European Central Bank. [Downloadable!]
    Other versions:
  2. David Backus & Jonathan H. Wright, 2007. "Cracking the conundrum," Finance and Economics Discussion Series 2007-46, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  3. Philip R. Lane & Sergio L. Schmukler, 2006. "The international financial integration of China and India," Proceedings, Federal Reserve Bank of San Francisco, issue Jun. [Downloadable!]
    Other versions:
  4. Mendoza, Enrique G & Quadrini, Vincenzo & Ríos-Rull, José-Víctor, 2007. "Financial Integration, Financial Deepness and Global Imbalances," CEPR Discussion Papers 6149, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. Frankel, Jeffrey, 2007. "Responding to Financial Crises," Working Paper Series rwp07-010, Harvard University, John F. Kennedy School of Government. [Downloadable!]
  6. Frederic S. Mishkin, 2008. "Globalization, Macroeconomic Performance, and Monetary Policy," NBER Working Papers 13948, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Roland Beck & Ebrahim Rahbari, 2008. "Optimal reserve composition in the presence of sudden stops - the euro and the dollar as safe haven currencies," Working Paper Series 916, European Central Bank. [Downloadable!]
  8. Matthew Canzoneri & Robert E. Cumby & Behzad Diba & David Lopez-Salido, 2008. "The Macroeconomic Implications of a Key Currency," NBER Working Papers 14242, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Enrique Martinez-Garcia, 2008. "Globalization and monetary policy: an introduction," Globalization and Monetary Policy Institute Working Paper 11, Federal Reserve Bank of Dallas. [Downloadable!]
  10. J. Benson Durham, 2007. "Implied interest rate skew, term premiums, and the "conundrum"," Finance and Economics Discussion Series 2007-55, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  11. Wendy Dobson & Anil K Kashyap, 2006. "The Contradiction in China’s Gradualist Banking Reforms," Working Papers Series 08, Rotman Institute for International Business, Joseph L. Rotman School of Management, University of Toronto. [Downloadable!]
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