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Working Paper
The Contribution of Foreign Holdings of U.S. Treasury Securities to the U.S. Long-Term Interest Rate: An Empirical Investigation of the Impact of the Zero Lower Bound
We find empirical evidence of a possible structural break in the relationship between the foreign holdings of U.S. Treasury securities and the U.S. long-term interest rate occurring at the time when U.S. monetary policy became constrained at the zero-lower bound (ZLB). The estimated marginal effect of the foreign holdings ratio on the U.S. long-term interest rate, particularly its long-run effect, appears to have become stronger during the ZLB regime than it was before. We argue that the leading explanation of this apparent break is the nonlinearity introduced by the ZLB. Motivated by theory, ...
Report
Is There Hope for the Expectations Hypothesis?
Most macroeconomic models impose a tight link between the term structure of interest rates and expected future short rates via the expectations hypothesis (EH). While systematically rejected in the data, existing tests of the EH typically assume full information rational expectations, stationarity of beliefs, or both. As such, they are ill-equipped to refute the EH when these assumptions fail to hold, leaving the door open for a “resurrection.” We re-evaluate the EH using direct measures of expected short rates from all available U.S. surveys of professional forecasters, combined with a ...