Interest Rate Changes in the U.S.
Henrik Thuren Econ 4810 Senior Seminar Appalachian State University
April 04, 2007
The Mystery of Interest Rate Movement
• What causes interest rates to change? • Is there a way to help predict how they will move? • Looking at a few key factors to see how they affect the interest rate.
Literature Review
• A Note on Federal Budget Deficits and the Term Structure of Real Interest Rates in the United States by Richard J. Cebula • Interest Rates and Expected Inflation, 1831-1914: A Rational Expectations Approach by Clifford F. Thies
Theory
• The IS-LM model and how it works.
Data
• Number of observations n=253 • Data gotten from the Federal Reserve website www.federalreserve.gov • Looked at Federal Budget, Inflation, Foreign Interest rates, One year, Two year, and Ten year treasury bond and bill rates.
Variables
• Dependant Variables
– One year Treasury bills – Two year Treasury bills – Ten year Treasury bond
• Independent Variables
– Federal budget – Foreign Interest rates (Japan and Canada) – Inflation rate
Results
• The statistically significant factors that influenced interest rates are the Canadian interest rate, Federal Budget, and Inflation rate • The statistically insignificant variables are the Japanese Interest rate
What do the Results Mean
• As the federal budget changes the interest rates both long term and short term will change accordingly • As Foreign Interest rates (Canadian in this case) change U.S. investors will put there money into a better investment situation in Canada • Inflation can also influence where people invest their money
Conclusion
• To help financial portfolios to maximize gains and minimize losses people should look to the federal budget, foreign interest rates, and potential inflation trends to try to predict how interest rates are going to move
More Research to Come
• There is much more research to be done since there are many, many different factors that can influence the movement of interest rates • Not all factors are strictly number some of it could be psyhcological • Keep on learning