The Case of the Negative Nominal Interest Rates

New Estimates of the Term Structure of Interest Rates during the Great Depression

Bibliographic Data

ID10174334
AuthorsStephen G Cecchetti (corresponding author)
Year1988
Volume96
Issue6
Pages1111-1141
Publication date1988-12-01
Peer ReviewedYes
Open AccessNo
TypeARTICLE
VenueJournal of Political Economy (JOURNAL)
Journal identifiersISSN: 0022-3808 • E-ISSN: 1537-534X
PublisherUniversity of Chicago Press (PUBLISHER • US)
DOI10.1086/261580
OpenAlexW2892372930
LanguageEN
Citations received5

During the 1930s and early 1940s U.S. Treasury bonds and notes had negative nominal yields as they approached maturity. But since an investor can always hold cash, this is impossible. Any bond must have a positive nominal yield. This paper poses a resolution to this puzzle: in addition to making coupon payments, Treasury securities were options that gave the owner the right to buy a new security on a future date. The paper proposes a method for valuing this 'exchange privilege' and computing the yield to the coupon bearing component of these composite bond/options. The case of the negative nominal interest rates demonstrates that the construction of accurate data requires close examination of the institutional environment, even when studying financial markets. The corrected bond and note yields are used to calculate new estimates of the term structure of interest rates from 1929 to 1949. These new data allow one to follow changes in the both the level and the shape of the yield curve during the Great Depression

Bond · Bond market · Coupon · Econometrics · Economics · Financial economics · Geography · Interest rate · Maturity (psychological · Monetary economics · Nominal interest rate · Political science · Real interest rate · Term (time · Treasury · Yield (engineering · Yield curve · Economic, financial, and policy analysis · Finance

Tools

Open DOISci-HubOpen Access