Official Demand for U.S. Debt: Implications for U.S. Real Rates
94 Pages Posted: 29 Jul 2014 Last revised: 21 Dec 2018
Date Written: December 20, 2018
We estimate a structural term-structure model in which arbitrageurs accommodate demand pressures exerted by domestic and foreign official investors, as well as supply pressures. These pressures can affect real rates by altering the aggregate price of duration risk, thus through changes in bond risk premiums. While foreign-official pressures contributed to reduce long-term real rates mainly in the years prior to the global-financial crisis, Fed's pressures materialized during the QE period. Overall, the two-factor model, augmented to account for changing liquidity conditions, offers a good representation of real rates during the 2001-2016 period; however, we flag some caveats and possible extensions.
Keywords: term structure of real rates; quantitative easing; global imbalances; Bayesian econometrics
JEL Classification: F31, G10
Suggested Citation: Suggested Citation