The Long-run Determinants of Indian Government Bond Yields

Tanweer Akram and Anupam Das

Economics Working Paper Archive from Levy Economics Institute

Abstract: This paper investigates the long-term determinants of Indian government bonds' (IGB) nominal yields. It examines whether John Maynard Keynes's supposition that short-term interest rates are the key driver of long-term government bond yields holds over the long-run horizon, after controlling for various key economic factors such as inflationary pressure and measures of economic activity. It also appraises whether the government finance variable--the ratio of government debt to nominal income--has an adverse effect on government bond yields over a long-run horizon. The models estimated here show that in India, short-term interest rates are the key driver of long-term government bond yields over the long run. However, the ratio of government debt and nominal income does not have any discernible adverse effect on yields over a long-run horizon. These findings will help policymakers in India (and elsewhere) to use information on the current trend in short-term interest rates, the federal fiscal balance, and other key macro variables to form their long-term outlook on IGB yields, and to understand the implications of the government's fiscal stance on the government bond market.

Keywords: Government Bond Yields; Interest Rates; Monetary Policy; India (search for similar items in EconPapers)
JEL-codes: E43 E50 E60 G10 G12 O16 (search for similar items in EconPapers)
Date: 2017-01
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (1)

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