The Empirics of UK Gilts’ Yields
Levy Economics Institute, Working Papers Series, No. 969
51 Pages Posted: 13 Nov 2020
Date Written: September 24, 2020
This paper analyzes the nominal yields of UK gilt-edged securities (“gilts”) based on a Keynesian perspective, which holds that the short-term interest rate is the primary driver of the long-term interest rate. Quarterly data are used to model gilts’ nominal yields. These models bring to light the complex dynamics relating the nominal yields on gilts to the short-term interest rate, inflation, the growth of industrial production, and the government debt ratio. The results show that the short-term interest rate has a crucial influence on the nominal yields on gilts, even after controlling for various factors. Contrary to widely held views, a higher government debt ratio does not lead to higher nominal yields.
Keywords: UK Gilt-Edged Securities, Government Bonds, Long-Term Interest Rates, Nominal Bond Yields, Government Debt
JEL Classification: E43, E50, E58, E60, G10, G12
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