Research Topics

This paper examines the dynamics of euro-denominated (EUR) long-term interest rate swap yields. It shows that the short-term interest rate has an economically and statistically significant effect on EUR swap yields of different maturity tenors, after controlling for various key macroeconomic variables. It presents several autoregressive distributive lag (ARDL) models of the dynamics of EUR swap yields. The estimated econometric models of EUR swap yields of different maturity tenors imply that the European Central Bank (ECB) exerts substantial influence on interest rate swap yields, primarily through the effect of its actions on the current short-term interest rate. Examining the case of EUR interest rate swaps, the findings of the paper lend additional credence to John Maynard Keynes’s hypothesis concerning the ability of a central bank to influence long-term market interest rates.

This paper econometrically models the dynamics of Swedish government bond (SGB) yields. It examines whether the short-term interest rate has a decisive influence on long-term SGB yields, after controlling for other macroeconomic and financial variables, such as consumer price inflation, the growth of industrial production, the stock price index, the exchange rate of the Swedish krona, and the balance sheet of Sweden’s central bank, Sveriges Riksbank. It applies an autoregressive distributive lag (ARDL) approach using monthly data to model SGB yields across the Treasury yield curve. The results of the estimated models show that the short-term interest rate has a marked influence on the long-term SGB yield. Such findings reaffirm John Maynard Keynes’s view that the central bank’s monetary policy affects long-term government bond yields through the current short-term interest rate.  It also shows that the interest rate behavior observed in Sweden is in concordance with empirical patterns discerned in previous studies related to government bond yields in both advanced countries and emerging markets.

This paper models the month-over-month change in euro-denominated (EUR) long-term interest rate swap yields. It shows that the change in the short-term interest rate has an economically and statistically significant effect on the change in EUR swap yields of different maturity tenors, after controlling for various macroeconomic and financial variables, such as the month-over-month change in inflation or core inflation and the growth of industrial production, and the percentage change in the equity price index, the exchange rate, and the size of the European Central Bank’s (ECB) balance sheet. It uses a generalized autoregressive conditional heteroskedasticity (GARCH) approach to model the dynamics of the monthly change in EUR swap yields and their volatility. The results of the estimated models of EUR swap yields of different maturity tenors extend the Keynesian view that the central bank’s monetary policy actions have a decisive influence on long-term government bond yields and long-term market interest rates, primarily through their effects on the current short-term interest rate.

This paper econometrically models the dynamics of Indian rupee (INR) swap yields based on key macroeconomic factors using the autoregressive distributive lag (ARDL) approach. It examines whether the short-term interest rate has a decisive influence on long-term INR swap yields after controlling for other factors, such as core inflation, the growth of industrial production, the logarithm of the equity price index, and the logarithm of the INR exchange rate. The estimated models show that the short-term interest rate has an important influence on the swap yields. This implies that the Reserve Bank of India (RBI) can sway borrowing and lending rates not just on Indian government bonds but also INR-denominated private-market financial instruments, such as swaps and swaptions.

This paper econometrically models Japanese yen (JPY)–denominated interest rate swap yields. It examines whether the short-term interest rate exerts an influence on the long-term JPY swap yield after controlling for several key macroeconomic variables, such as core inflation, the growth of industrial production, the percentage change in the equity price index, and the percentage change in the exchange rate. It also tests whether there are structural breaks in the dynamics of Japanese swap yields and related variables. The estimated econometric models show that the short-term interest rate exerts an important influence on the long-term swap yield in some periods but not in other periods in which core inflation exerts a marked influence on the swap yield. The findings from the econometric models reveal a discernable relationship between the call rate and the swap yield of different maturity tenors clearly held prior to April 2014 but did not in the subsequent period. These findings highlight the limits and scope of John Maynard Keynes’s contention that the central bank’s policy rate commands a decisive influence over the long-term market rate through the short-term interest rate. The policy implications of the estimated models’ results are discussed.

This paper models the dynamics of Chinese yuan (CNY)–denominated long-term interest rate swap yields. The financial sector plays a vital role in the Chinese economy, which has grown rapidly in the past several decades. Going forward, interest rate swaps are likely to have an important role in the Chinese financial system. This paper shows that the short-term interest rate exerts a decisive influence on the long-term swap yield after controlling for various macro-financial variables, such as inflation or core inflation, the growth of industrial production, percent change in the equity price index, and the percentage change in the CNY exchange rate. The autoregressive distributed lag (ARDL) approach is applied to model the dynamics of the long-term swap yield. The empirical findings show that the People’s Bank of China’s influence extends even to the over-the-counter derivative products, such as CNY interest rate swap yields, through the short-term interest rate. The findings reinforce and extend John Maynard Keynes’s notion that the central bank’s actions have a decisive role in setting the long-term interest rate in emerging market economies, such as China.

John Maynard Keynes argued that the central bank influences the long-term interest rate through the effect of its policy rate on the short-term interest rate. However, Keynes's claim was confined to the behavior of the long-term government bond yield. This paper investigates whether Keynes's claim holds for the yields of spread products and over-the-counter financial derivatives by econometrically modeling the dynamics of the pound sterling–denominated long-term interest rate swap yield. It uses the generalized autoregressive conditional heteroskedasticity (GARCH) modeling approach to examine the relationship between the month-over-month changes in the short-term swap yield and the month-over-month change in the long-term swap yield, while controlling for several key macroeconomic and financial variables. The month-over-month change in the short-term interest rate has a positive and statistically significant effect on the month-over-month change in the long-term swap yield. This finding reinforces Keynes's conjecture concerning the central bank's influence over the long-term interest rate. The investigation's empirical findings and their policy implications are discussed from a Keynesian perspective.

A Keynesian Perspective

John Maynard Keynes (1930) asserted that the central bank sways the long-term interest rate through the influence of its policy rate on the short-term interest rate. Recent empirical research shows that Keynes's conjecture holds for long-term Treasury yields in the United States. This paper investigates whether Keynes's conjecture also holds for the monthly changes in US long-term swap yields by econometrically modeling its dynamics using an autoregressive distributed lag (ARDL) approach. The econometric modeling reveals that there is statistically significant effect on the monthly changes in the Treasury bill rate on the monthly changes in swap yields of different maturity tenors after controlling for a host of macroeconomic and financial control variables. The findings from the econometric models that are estimated render a perspicacious Keynesian perspective on key policy questions and contemporary debates in macroeconomics and finance.

This paper econometrically models the dynamics of the Chilean interbank swap yields based on macroeconomic factors. It examines whether the month-over-month change in the short-term interest rate has a decisive influence on the long-term swap yield after controlling for other factors, such as the change in inflation, change in the growth of industrial production, change in the log of the equity price index, and change in the log of the exchange rate. It applies the generalized autoregressive conditional heteroskedasticity (GARCH) approach to model the dynamics of the long-term swap yield. The change in the short-term interest rate has an economically meaningful and statistically significant effect on the change of the interbank swap yield. This means that the Banco Central de Chile’s (BCCH) monetary policy exerts an important influence on interbank swap yields in Chile.