International Capital Flows and U.S. Interest Rates

45 Pages Posted: 5 Oct 2005

See all articles by Francis E. Warnock

Francis E. Warnock

University of Virginia - Darden Business School; National Bureau of Economic Research (NBER)

Veronica Cacdac Warnock

Darden Business School

Multiple version iconThere are 2 versions of this paper

Date Written: September 2006

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: bond yields, Japan, China, petrodollars

JEL Classification: E43, E44, F21

Suggested Citation

Warnock, Francis E. and Warnock, Veronica Cacdac, International Capital Flows and U.S. Interest Rates (September 2006). FRB International Finance Discussion Paper No. 840; IIIS Discussion Paper No. 103. Available at SSRN: https://ssrn.com/abstract=813044 or http://dx.doi.org/10.2139/ssrn.813044

Francis E. Warnock (Contact Author)

University of Virginia - Darden Business School ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-6076 (Phone)

HOME PAGE: http://faculty.darden.virginia.edu/warnockf/index.htm

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138-5398

Veronica Cacdac Warnock

Darden Business School ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

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