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Francis E. Warnock, Veronica Cacdac Warnock
NBER Working Paper No. 12560*
Issued in October 2006
NBER Program(s): IFM
ME
An NBER digest for this paper is available.
---- 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.
*Published: forthcoming, Journal International Money and Finance
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