An analysis of UK swap yields

Document Type

Article

Publication Date

11-1-2024

Abstract

John Maynard Keynes argued that the central bank influences the long-term interest rate through the effect of its policy rate on the current 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 (GBP)–denominated long-term interest rate swap yield. It uses the generalized autoregressive conditional heteroskedasticity modeling approach to examine the relationship between the month-over-month change in the current short-term interest rate 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 current 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 and extends 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.

DOI

https://doi.org/10.1080/01603477.2023.2242348

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