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Interest Rate Conundrum

Author

Listed:
  • Craine Roger

    () (University of California, Berkeley)

  • Martin Vance L

    () (University of Melbourne)

Abstract

In June of 2004 the Fed began relentlessly tightening policy. They raised the Federal Funds Target (Target) from 1% to 5 1/4% in 1/4% increments at seventeen consecutive meetings. While short rates dutifully followed the Target up, long maturity rates actually fell. Alan Greenspan in 2005 Congressional testimony labeled the strange behavior of the spread between long rates and the Target a "conundrum." This paper examines the conundrum. We present robust empirical evidence that the increase in foreign holdings of U.S. Treasury bonds explains at least half of the decline in long maturity rates. Foreign holdings of U.S. Treasury debt with a maturity over one year grew from 20% in 1994 to 57% in 2007.

Suggested Citation

  • Craine Roger & Martin Vance L, 2009. "Interest Rate Conundrum," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-29, March.
  • Handle: RePEc:bpj:bejmac:v:9:y:2009:i:1:n:8
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    References listed on IDEAS

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    1. Ben S. Bernanke & Vincent R. Reinhart & Brian P. Sack, 2004. "Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 35(2), pages 1-100.
    2. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June.
    3. Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-576, June.
    4. Ben S. Bernanke, 2005. "The global saving glut and the U.S. current account deficit," Speech 77, Board of Governors of the Federal Reserve System (U.S.).
    5. repec:fip:fedgsq:y:2005:i:mar10 is not listed on IDEAS
    6. James H. Stock & Mark W. Watson, 1989. "New Indexes of Coincident and Leading Economic Indicators," NBER Chapters,in: NBER Macroeconomics Annual 1989, Volume 4, pages 351-409 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Catte, Pietro & Cova, Pietro & Pagano, Patrizio & Visco, Ignazio, 2011. "The role of macroeconomic policies in the global crisis," Journal of Policy Modeling, Elsevier, vol. 33(6), pages 787-803.
    2. Barry Eichengreen, 2012. "Macroeconomic and Financial Policies Before and After the Crisis," Chapters,in: Global Economic Crisis, chapter 8 Edward Elgar Publishing.
    3. Eduardo Fernandez-Arias & Peter Montiel, 2009. "Crisis Response in Latin America: Is the "Rainy Day" at Hand?," Research Department Publications 4628, Inter-American Development Bank, Research Department.
    4. Barry Eichengreen, 2010. "Globalization and the Crisis by Barry Eichengreen," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 11(3), pages 20-24, October.
    5. Byrne, Joseph P. & Fazio, Giorgio & Fiess, Norbert, 2012. "Interest rate co-movements, global factors and the long end of the term spread," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 183-192.
    6. Goda, Thomas & Lysandrou, Photis & Stewart, Chris, 2013. "The contribution of US bond demand to the US bond yield conundrum of 2004–2007: An empirical investigation," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 27(C), pages 113-136.
    7. Pablo Moreno, 2013. "The Metamorphosis of the IMF (2009-2011)," Estudios Económicos, Banco de España;Estudios Económicos Homepage, number 78.
    8. Saar, Dan & Yagil, Yossi, 2015. "Forecasting growth and stock performance using government and corporate yield curves: Evidence from the European and Asian markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 37(C), pages 27-41.
    9. Arvind Subramanian, 2011. "Renminbi Rules: The Conditional Imminence of the Reserve Currency Transition," Working Paper Series WP11-14, Peterson Institute for International Economics.

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