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What keeps long-term U.S. interest rates so low?

Tanweer Akram and Huiqing Li (huiqing.li@siu.edu)

Economic Modelling, 2017, vol. 60, issue C, 380-390

Abstract: U.S. government indebtedness and fiscal deficits increased notably following the Global Financial Crisis. Yet long-term interest rates and U.S. Treasury yields have remained remarkably low. What keeps long-term interest rates so low? This paper relies on a simple model, based on John Maynard Keynes’ view that the central bank's actions are the key drivers of long-term interest rates, to explain the behavior of long-term interest rates in the U.S. The empirical findings confirm that short-term interest rates are the most important determinants of long-term interest rates in the U.S. Contrary to conventional wisdom, higher government indebtedness has a negative effect on long-term interest rates, particularly on a long run basis. However, in the short run, higher government indebtedness has a positive effect on long-term interest rates. These are relevant for contemporary policy debates and macroeconomic theory.

Keywords: E43; E50; E58; E60; G10; G12; Government bond yields; Long-term interest rates; Short-term interest rates; Monetary policy; Central bank; John Maynard Keynes (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:60:y:2017:i:c:p:380-390

DOI: 10.1016/j.econmod.2016.09.017

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