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Working Paper No. 969 | September 2020

The Empirics of UK Gilts’ Yields

This paper analyzes the nominal yields of UK gilt-edged securities (“gilts”) based on a Keynesian perspective, which holds that the short-term interest rate is the primary driver of the long-term interest rate. Quarterly data are used to model gilts’ nominal yields. These models bring to light the complex dynamics relating the nominal yields on gilts to the short-term interest rate, inflation, the growth of industrial production, and the government debt ratio. The results show that the short-term interest rate has a crucial influence on the nominal yields on gilts, even after controlling for various factors. Contrary to widely held views, a higher government debt ratio does not lead to higher nominal yields.

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Author(s): L. Randall Wray, Flavia Dantas, Scott Fullwiler, Pavlina R. Tcherneva, Stephanie A. Kelton
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