A Keynesian analysis of Canadian government securities yields
DOI:
https://doi.org/10.13133/2037-3643_73.294_3Keywords:
Canadian government bond yields, long-term interest rate, short-term interest rate.Abstract
Keynes argued that the short-term interest rate is the main driver of the long-term interest rate on government bonds. This paper empirically models the relationship between the short-term interest rate and long-term government securities yields in Canada, after controlling for other important financial variables. The statistical analysis uses high-frequency daily data from 1990 to 2018 to examine the behavioral dynamics of the long-term interest rate. The empirical results show that the actions of the Bank of Canada are key drivers of Canadian government securities yields in the long run, which supports the Keynesian perspective. There is a positive association between long-term bond yields and the Canadian federal government’s net debt to GDP ratio, but the effect is fairly modest. An important implication of these findings is that the Bank of Canada’s actions can have a decisive effect on the long-term interest rate over the long horizon.
JEL codes: E43, E50, E60, G10, G12
References
Akram T. and Das A. (2014), “Understanding the Low Yields of the Long-Term Japanese Sovereign Debt”, Journal of Economic Issues, 48 (2), pp. 331-340.
Akram T. and Das A. (2015), “A Keynesian Explanation of Indian Government Bond Yields”, Journal of Post Keynesian Economics, 38 (4), pp. 565-587.
Akram T. and Das A. (2017), “The Dynamics of Government Bond Yields in the Eurozone”, Annals of Financial Economics, 12 (3), pp. 1750011/1-1750011/18.
Akram T. and Das A. (2019a), “The Long-Run Determinants of Indian Government Bond Yields”, Asian Development Review, 36 (1), pp. 168-205.
Akram T. and Das A. (2019b), “An Analysis of the Daily Changes in US Treasury Security Yields”, Levy Economics Institute Working Paper, no. 934 (August), Annandale-on-Hudson (NY): Levy Economics Institute of Bard College.
Akram T. and Das A. (2020), “Australian Government Bonds Nominal Yields: A Keynesian Perspective”, Annals of Financial Economics, 15 (1), pp. 2050003/1-2050003/20.
Akram T. and Li H. (2017), “What Keeps Long-Term U.S. Interest Rates So Low?”, Economic Modelling, 60 (January), pp. 380-390.
Akram T. and Li H. (2019), “The Impact of the Bank of Japan’s Monetary Policy on Japanese Government Bonds’ Low Nominal Yields”, Levy Economics Institute Working Paper, no. 938 (October), Annandale-on-Hudson (NY): Levy Economics Institute of Bard College.
Akram T. and Li H. (2020). “An Inquiry Concerning Long-Term U.S. Interest Rates Using Monthly Data”, Applied Economics, 52 (24), pp. 2594-2621.
Ardagna S., Caselli F. and Lane T. (2007), “Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries”, The B.E. Journal of Macroeconomics, 7 (1), pp. 1-33.
Baldacci E. and Kumar M. (2010), “Fiscal Deficits, Public Debt, and Sovereign Bond Yields”, IMF Working Paper, no. 10/184, Washington (DC): International Monetary Fund.
Bank of Canada (2020), “Government Securities Auction,” available at https://www.bankofcanada.ca/markets/government-securities-auctions/ (date of access: 3 May 2020).
Bindseil U. (2004), Monetary Policy Implementation: Theory, Past and Present, Oxford (UK) and New York (NY): Oxford University Press.
Bollerslev T., Cai J. and Song F.M. (2000), “Intraday Periodicity, Long Memory Volatility, and Macroeconomic Announcement Effects in the US Treasury Bond Market”, Journal of Empirical Finance, 7 (1), pp. 37-55.
Davidson P. (2015), Post Keynesian Theory and Policy: A Realistic Analysis of the Market-Oriented Capitalist Economy, Cheltenham (UK) and Northampton (MA): Edward Elgar.
Department of Finance (2019), Debt Management Report 2018-2019, Ottawa (ON): Department of Finance.
Doi T., Hoshi T. and Okimoto T. (2011), “Japanese Government Debt and Sustainability of Fiscal Policy”, Journal of the Japanese and International Economies, 25 (4), pp. 414-433.
Elmendorf D.W. and Mankiw N.G. (1998), “Government Debt”, NBER Working Paper, no. 6470, Cambridge (MA): National Bureau of Economic Research.
Fullwiler S.T. ([2008] 2017), “Modern Central Bank Operations: The General Principles”, in Rochon L.-P. and Rossi S. (eds.), Advances in Endogenous Money Analysis, Cheltenham (UK) and Northampton (MA): Edward Elgar.
Gruber J.W. and Kamin S.B. (2012), “Fiscal Positions and Government Bond Yields in OECD Countries”, Journal of Money, Credit, and Banking, 44 (8), pp. 1563-1587.
Gürkaynak R.S., Sack B. and Wright J.H. (2007), “The US Treasury Yield Curve: 1961 to the Present”, Journal of Monetary Economics, 54 (8), pp. 2291-2304.
Hansen G. and İmrohoroğlu S. (2013), “Fiscal Reform and Government Debt in Japan: A Neoclassical Perspective”, Review of Economic Dynamics, 21 (July), pp. 201-224.
Horioka C.Y., Nomoto T. and Terada-Hagiwara A. (2014), “Why has Japan’s Massive Government Debt Not Wreaked Havoc (Yet)?”, The Japanese Political Economy, 40 (2), pp. 3-23.
Hoshi T. and Ito T. (2013), “Is the Sky the Limit? Can Japanese Government Bonds Continue to Defy Gravity?”, Asian Economic Policy Review, 8 (2), pp. 218–247.
Hoshi T. and Ito T. (2014), “Defying Gravity: Can Japanese Sovereign Debt Continue to Increase Without a Crisis?”, Economic Policy, 29 (77), pp. 5-44.
Keynes J.M. (1930), A Treatise on Money, Vol. II: The Applied Theory of Money, London (UK): Macmillan.
Keynes J.M. ([1936] 2007), The General Theory of Employment, Interest, and Money, New York (NY): Palgrave Macmillan.
Kregel J. (2011), “Was Keynes’ Monetary Policy À Outrance in the Treatise, a Forerunner of ZIRP and QE? Did He Change his Mind in the General Theory?”, Levy Economics Institute Policy Note, no. 2011/4, Annandale-on-Hudson (NY): Levy Economics Institute of Bard College.
Lam R.W. and Tokuoka K. (2013), “Assessing the Risks to the Japanese Government Bond (JGB) Market”, Journal of International Commerce, Economics and Policy, 4 (1), pp. 1350002/1-1350002/15.
Lerner A.P. (1947), “Money as a Creature of the State”, American Economic Review, 37 (2), pp. 312–317.
Lavoie M. (2014), Post-Keynesian Economics: New Foundations, Cheltenham (UK) and Northampton (MA): Edward Elgar.
Levrero E.S. and Deleidi M. (2019), “The Causal Relationship Between Short- and Long-Term Interest Rates: An Empirical Assessment of the United States”, MPRA Paper, no. 93608, Munich: University Library of Munich.
Macrobond (various years), Macrobond subscription services, available at https//www.macrobond.com (date of access: 20 October 2019).
Paccagnini A. (2016), “The Macroeconomic Determinants of the US Term Structure During the Great Moderation”, Economic Modelling, 52 (January), pp. 216-225.
Pesaran M.H., Shin Y. and Smith R.J. (2001), “Bounds Testing Approaches to the Analysis of Level Relationships”, Journal of Applied Econometrics, 16 (3), pp. 289-326.
Poghosyan T. (2014), “Long-Run and Short-Run Determinants of Sovereign Bond Yields in Advanced Economies”, Economic Systems, 38 (1), pp. 100-114.
Riefler W.W. (1930), Money Rates and Money Markets in the United States, New York (NY) and London (UK): Harper & Brothers.
Reinhart C.M. and Rogoff K.S. (2009), This Time Is Different: Eight Centuries of Financial Folly, Princeton (NJ): Princeton University Press.
Simoski S. (2019), A Keynesian Exploration of the Determinants of Government Bond Yields for Brazil, Colombia, and Mexico, Master of Science thesis, Annandale-on-Hudson (NY): Levy Economics Institute of Bard College.
Sims C.A. (2013), “Paper Money”, American Economic Review, 103 (2), pp. 563-584.
Statistics Canada (2020), Table 38-10-0237-01, “Financial Indicators of General Government sector, National Balance Sheet Accounts”. Available at: https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3810023701 (date of access: 21 June 2020).
Tkačevs O. and Vilerts K. (2019), “The Impact of Government Borrowing Costs on Fiscal Discipline”, Kyklos, 729 (3), pp. 446-471.
Tokuoka K. (2012), “Intergenerational Implications of Fiscal Consolidation in Japan”, IMF Working Paper, no. 12/197, Washington (DC): International Monetary Fund.
Wray L.R. (2012), Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems, New York (NY): Palgrave Macmillan.
Downloads
Published
How to Cite
Issue
Section
License
