An inquiry concerning long-term U.S. interest rates using monthly data. Issue 24 (20th May 2020)

• Record Type: Journal Article
• Authors: Akram, Tanweer; Li, Huiqing
• Is Part Of: Applied economics. Volume 52:Issue 24(2020)
• Page Start: 2594
• Page End: 2621
• Publication Date: 2020-05-20
• Subjects: Government bond yields -- long-term interest rates -- short-term interest rates -- monetary policy -- central bank -- John Maynard Keynes; E43 -- E50 -- E58 -- E60 -- G10; Economics -- Periodicals; 330
• DOI: 10.1080/00036846.2019.1693696
• Languages: English
• ISSNs: 0003-6846

Abstract

ABSTRACT: This paper undertakes an empirical inquiry concerning the determinants of the long-term interest rate on U.S. Treasury securities. It applies the bounds testing procedure to cointegration and error correction models within the autoregressive distributive lag (ARDL) framework, using monthly data and estimating a wide range of Keynesian models of long-term interest rates. While previous studies have mainly relied on quarterly data, the use of monthly data substantially expands the number of observations. This in turn enables the calibration of a wide range of models to test various hypotheses. The short-term interest rate is the key determinant of the long-term interest rate, while the rate of core inflation and the pace of economic activity also influence the long-term interest rate. A rise in the ratio of the federal fiscal balance (government net lending/borrowing as a share of nominal GDP) lowers the long-term interest rate on Treasury securities. The short- and long-run effects of short-term interest rates, the rate of inflation, the pace of economic activity, and the fiscal balance ratio on the long-term interest rate are estimated. The findings reinforce Keynes's prescient insights on the determinants of government bond yields.