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The Empirics of Long-Term US Interest Rates

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  • Tanweer Akram
  • Huiqing Li

Abstract

US government indebtedness and fiscal deficits increased notably following the global financial crisis. Yet long-term interest rates and US Treasury yields have remained remarkably low. Why have long-term interest rates stayed low despite the elevated government indebtedness? What are the drivers of long-term interest rates in the United States? John Maynard Keynes holds that the central bank's actions are the main determinants of long-term interest rates. A simple model is presented where the central bank's actions are the key drivers of long-term interest rates through short-term interest rates and various monetary policy measures. The empirical findings reveal that short-term interest rates, after controlling for other crucial variables such as the rate of inflation, the rate of economic activity, fiscal deficits, government debts, and so forth, are the most important determinants of long-term interest rates in the United States. Public finance variables, such as government fiscal balances or government indebtedness, as a share of nominal GDP appear not to have any discernable effect on long-term interest rates.

Suggested Citation

  • Tanweer Akram & Huiqing Li, 2016. "The Empirics of Long-Term US Interest Rates," Economics Working Paper Archive wp_863, Levy Economics Institute.
    • Handle: RePEc:lev:wrkpap:wp_863
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    Cited by:

    1. Asuamah Yeboah, Samuel, 2017. "Are interest rates unit root in Ghana? An Empirical Assessment," MPRA Paper 99420, University Library of Munich, Germany.
    2. Tanweer Akram, 2019. "Prospects and Risks for the Global Economy in 2019," CPD Working Paper 130, Centre for Policy Dialogue (CPD).
    3. Akram, Tanweer & Li, Huiqing, 2017. "What keeps long-term U.S. interest rates so low?," Economic Modelling, Elsevier, vol. 60(C), pages 380-390.
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    5. Levrero, Enrico Sergio & Deleidi, Matteo, 2019. "The causal relationship between short- and long-term interest rates: an empirical assessment of the United States," MPRA Paper 93608, University Library of Munich, Germany.

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    More about this item

    Keywords

    Government Bond Yields; Long-Term Interest Rates; Short-Term Interest Rates; Monetary Policy;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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