International Capital Flows and U.S. Interest Rates

Francis E. Warnock · Veronica Cacdac Warnock

55 citations0/0 files storedNational Bureau of Economic Research

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Monetary Policy and Economic Impact Financial Markets and Investment Strategies Global Financial Crisis and Policies

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.

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References

1986The Economics of Money, Banking and Financial Markets 2005Does financial liberalization spur growth?2003Zero Bound on Interest Rates and Optimal Monetary Policy 1998It's Baaack: Japan's Slump and the Return of the Liquidity Trap 1998CAPITAL FLOWS AND CAPITAL-MARKET CRISES: The Simple Economics of Sudden Stops 2005The Sensitivity of Long-Term Interest Rates to Economic News: Evidence and Implications for Macroeconomic Models 2002Order Flow and Exchange Rate Dynamics 1983Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates

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