A Note Concerning the Dynamics of Government Bond Yields

Abstract

Keynes argued that the central bank can influence the long-term interest rate on government bonds and the shape of the yield curve mainly through the short-term interest rate. Several recent empirical studies that examine the dynamics of government bond yields not only substantiate Keynes’s view that the long-term interest rate responds markedly to the short-term interest rate but also have relevance for macroeconomic theory and policy. This article relates Keynes’s discussions of money, the state theory of money, financial markets, investors’ expectations, uncertainty, and liquidity preference to the dynamics of government bond yields for countries with monetary sovereignty. Investors’ psychology, herding behavior in financial markets, and uncertainty about the future reinforce the effects of the short-term interest rate and the central bank’s monetary policy actions on the long-term interest rate. JEL classifications: E12; E40; E43; E50; E58; E60; F30; G10; G12; H62; H63

Seven Replies to the Critiques of Modern Money Theory

“…the 2020-21 COVID-19 pandemic, the same occurred and similar lessons can be drawn for other countries(Borio et al 2017;Sharpe 2013;Akram and Al-Helal Uddin 2021;Akram 2021). …”

Multifactor Keynesian models of the long-term interest rate

“…Econometric analysis of the data in several emerging markets shows that the relationship between the short-term interest rate and the long-term interest rate also holds there. Akram and Das (2019) and Vinod, Chakraborty, and Karun (2014) provide evidence of this for India, while Akram andUddin (2020, 2021) do so for two key Latin American countries, namely Brazil and Mexico. The overall evidence from recent empirical studies, which shows that the short-term interest rate and the long-term interest rate are usually strongly correlated, suggests that multifactor Keynesian models can enrich the theoretical understanding of the long-term interest rate's dynamics and their relationships with fundamental macroeconomic and financial variables.…”

“…Similar patterns hold in other advanced countries. Akram andLi (2020b, 2020c), Akram and Das (2020), and Das and Akram (2020) respectively show that empirical analysis reveals that there are strong positive correlations between the long-term interest rate and the short-term interest rate in Japan, the United Kingdom, Australia, and Canada. Deleidi and Levrero (2021) find the central bank can permanently affect the long-term interest rate through its influence on the short-term interest rate using US data.…”

“…Recent work lends credence to Keynes's views on government bonds' long-term interest rate dynamics. Akram andLi (2017, 2020a) show the influence of the short-term interest rate on the long-term interest rate on US Treasury securities. Similar patterns hold in other advanced countries.…”

A Keynesian Approach to Modeling the Long-Term Interest Rate

“…The Keynesian approach to modeling long-term government bond yields has been revamped in recent years in several empirical studies, such as Akram and Das (2015, 2017, 2019, Akram and Li (2020a, 2020b, 2020c, 2020d, Akram andUddin (2020, 2021), Chakraborty (2016), Das and Akram (2020), Gabrisch (2021), Levrero and Deleidi (2020), Rahimi (2014), Rahimi, Chu, and Lavoie (2017), Simoski (2019), andVinod, Chakraborty, andKarun (2014). There are also a few theoretical studies, such as Akram (2021aAkram ( , 2021b and Wray (1992), that have advanced the Keynesian approach to interest rate modeling, building on Keynes's approach to interest rate dynamics, as reflected in Keynes (1937) and Robinson (1951), and money and credit as articulated in Keynes (1930Keynes ( , [19362007) and the works of Keynesians, such as Lavoie (1984). This approach has contested the conventional view based on the loanable funds theory of interest rates.…”