Determinants Of Long-Term Interest Rates In The United States

Abstract

The behavior of the long-term interest rates is a practical problem for private and public organizations.  Organizations need to estimate interest rates for purposes of assigning value to long-term obligations such as defined benefit plans and long-term leases and making decisions related to long term capital purchases.  The purpose of this study was to analyze the determinants of long-term interest rates in the United States, using 352 quarterly time series data points extending from 1999 to 2009.  This study examines how a change in overnight interest rates, budget deficit, Gross Domestic Product (GDP), inflation, and net capital inflow impact on long-term interest rates, which is the 30-year U.S. Treasury constant securities rate.  We find that the variables (overnight interest rates, expected inflation, budget deficit, foreign capital inflow, and GDP) have statistically significant impact on long-term interest rates in the United States; all variables jointly explain changes in the long-term interest rates.  The findings of this study can assist organization as they assign values to long-term obligations and assets.