ABSTRACT
This paper presents empirical models of Mexican government bond (MGB) yields based on monthly macroeconomic data. The current short-term interest rate has a decisive influence on MGB yields, after controlling for inflation and growth in industrial production. John Maynard Keynes claimed that long-term government bond yields move in lockstep with the short-term interest rate. The models presented in this paper show that Keynes’s claim holds for MGB yields. This has important policy implications for Mexico. The empirical findings of the paper are also relevant for ongoing debates in macroeconomics.
Acknowledgments
The authors thank Ms. Elizabeth Dunn for her copyediting support.
Disclosure statement
The authors, herby, declare that they do not have any conflict of interest. They affirm that they do not have any relevant or material interests that relate to the research described in this paper.
Disclaimer
The authors’ institutional affiliations are provided solely for identification purposes. Views expressed are solely those of the authors. The standard disclaimer applies.
The data set is available for replication
The data set used in this paper is available upon request for replication and verification.
HIGHLIGHTS
This paper analyzes the determinants of long-term Mexican government bond yields.
The autoregressive distributed lag approach is applied to model MGB yields.
The paper uses monthly macroeconomic and financial data.
The current short-term interest rate is a key driver of long-term MGB yields.
The findings presented in the paper vindicate Keynes’s view that the central bank’s actions have a crucial influence on long-term government bond yields.
Notes
1. Phillips and Perron unit root tests are provided in the working paper. The results yield identical conclusions. Several additional regressions, additional figures, and scatterplots are also displayed in the working paper.
2. The robustness checks are also conducted using MGBs of another maturity tenor, namely MGB3Y. Results using MGB3Y are provided in appendix B of the working paper.
Additional information
Funding
Notes on contributors
Tanweer Akram
Tanweer Akram is Senior Vice President/Senior Economist at Citibank.
Syed Al-Helal Uddin
Syed Al-Helal Uddin is Visiting Professor in the Department of Economics at East West University.