Working Paper: NBER ID: w12560
Authors: Francis E. Warnock; Veronica Cacdac Warnock
Abstract: Foreign official purchases of U.S. government bonds have an economically large and statistically significant impact on long-term interest rates. Federal Reserve credibility, as evidenced by dramatic reductions in both long-term inflation expectations and the volatility of long rates, contributed much to the decline of long rates in the 1990s. More recently, however, foreign flows have become important. Controlling for various factors given by a standard macroeconomic model, we estimate that had there been no foreign official flows into U.S. government bonds over the past year, the 10-year Treasury yield would currently be 90 basis points higher. Our results are robust to a number of alternative specifications.
Keywords: International Capital Flows; US Interest Rates; Treasury Bonds
JEL Codes: E43; E44; F21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Foreign official purchases of US government bonds (F34) | Long-term interest rates (E43) |
| Foreign flows into US bonds (F32) | 10-year Treasury yield (E43) |
| Fluctuations in foreign flows (F32) | Changes in long-term interest rates (E43) |
| Foreign capital flows (F21) | Dynamics of US interest rates (E43) |
| Foreign flows into US bonds (F32) | Corporate bond rates (E43) |
| Foreign flows into US bonds (F32) | Mortgage rates (G21) |
| Foreign flows into US bonds (F32) | Short-term rates (E43) |