Krugman on UST Debt, Fed Purchases, & Interest Rates

Paul Krugman has a nice post challenging the sometimes accepted wisdom that the fed “gobbling up” massive amounts of UST is the primary reason for low rates. He makes three points:

  • “As Bernanke stressed, long-term interest rates have moved very similarly across a wide range of countries, including countries where the central bank is buying up lots of bonds and countries where it isn’t. Here, for example, is a comparison of the US and France:”


  • “if Fed purchases of bonds are crucial to keeping rates down, we should see spikes in rates when those purchases stop. In fact, a lot of people predicted that this would happen in mid-2011, when QE2 came to an end — and lost a lot of money as a result. Here’s Fed holdings of long-term assets (agency debt plus long-term Treasury debt), from here, versus long-term bond rates:”

  • “So if you believe that the Fed has been keeping rates artificially low for years on end — which is apparently what Everyone believes — where’s my overheated economy?”

About ozidar

I'm an Assistant Professor of Economics at the University of Chicago Booth School of Business and a Faculty Research Fellow at National Bureau of Economic Research. You can follow me on twitter @omzidar.
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