A Time-Series Perspective on Safety, Liquidity, and Low Interest Rates

Bok, Brandyn; Del Negro, Marco; Giannone, Domenico; Giannoni, Marc; Tambalotti, Andrea

Discussion Paper

A Time-Series Perspective on Safety, Liquidity, and Low Interest Rates

Abstract: The previous post in this series discussed several possible explanations for the trend decline in U.S. real interest rates since the late 1990s. We noted that while interest rates have generally come down over the past two decades, this decline has been more pronounced for Treasury securities. The conclusion that we draw from this evidence is that the convenience associated with the safety and liquidity embedded in Treasuries is an important driver of the secular (long-term) decline in Treasury yields. In this post and the next, we provide an overview of the two complementary empirical strategies we adopt to extract the trends in real interest rates and quantify their driving factors. Much more detail on all of this can be found in our recently published Brookings paper.

Keywords: r star; convenience yields; safety; liquidity;

JEL Classification: E2; E5;