An analysis of UK swap yields

Arbeitspapier

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 longterm 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-overmonth 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.

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• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 1012

Classification and Topics

• Classification: Wirtschaft ; Interest Rates: Determination, Term Structure, and Effects ; Monetary Policy, Central Banking, and the Supply of Money and Credit: General ; Central Banks and Their Policies ; Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General ; General Financial Markets: General (includes Measurement and Data) ; Asset Pricing; Trading Volume; Bond Interest Rates
• Subject: Interest Rate Swaps ; Swap Yields ; Interest Rates ; Bank of England ; John Maynard Keynes

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Akram, Tanweer ; Mamun, Khawaja
• Event: Veröffentlichung
• (who): Levy Economics Institute of Bard College
• (where): Annandale-on-Hudson, NY
• (when): 2022

Further information

• Handle: http://hdl.handle.net/10419/273874