Liquidity Preference, Interest Rate Spread, and the Transformation of the US Financial System
Bibliographic Data
| ID | 21549331 |
|---|---|
| Authors | Yeo Hyub Yoon (0000-0002-6716-841X, University of Denver, Denver, CO, USA, corresponding author), Grishma Neupane (University of Denver, Denver, CO, USA) |
| Year | 2024 |
| Volume | 56 |
| Issue | 4 |
| Pages | 497-509 |
| Publication date | 2024-12-01 |
| Peer Reviewed | Yes |
| Open Access | Yes |
| Type | ARTICLE |
| Venue | Review of Radical Political Economics (JOURNAL) |
| Journal identifiers | ISSN: 0486-6134 • E-ISSN: 1552-8502 |
| Publisher | SAGE Publications (PUBLISHER • US) |
| DOI | 10.1177/04866134241275185 |
| OpenAlex | W4403360287 |
| Language | EN |
| References cited | 11 |
This article examines empirical patterns of interest rate spreads between yields on long-term corporate bonds and the Federal Funds Rate (FFR) in the United States over the period from 1960 through 2023. Since the early 1980s, discernible patterns of interest spreads have emerged, revealing marked deviations in corporate bond yields from the FFR. We focus on financial market forces particularly arising from financial intermediaries in analyzing these patterns. To this end, the article develops a theoretical framework based on the concept of liquidity preference in Keynes’s 1937 papers and the works of Hyman Minsky and Victoria Chick. We also conduct cointegration analyses for corporate bond yields, the FFR, and financial intermediaries’ leverage ratios. Overall, our empirical results indicate that the relationship between the FFR and corporate bond yields—particularly with respect to their long-run relationship and interest rate markups—has markedly changed since the 1980s and is significantly affected by financial intermediaries’ asset/capital leverage ratios. As a policy implication, regulatory reforms aimed at enhancing the Federal Reserve Bank’s capacity to steer long-term rates and contain intermediaries’ balance sheet leverage, particularly those centered on risky asset trading to increase gains from price differentials, are required JEL Classification: B26, E11, E43, E52
Business · Economics · Financial system · Interest rate · Liquidity preference · Market liquidity · Microeconomics · Monetary economics · Preference · Banking stability, regulation, efficiency · Economic theories and models · Monetary Policy and Economic Impact
| Citation velocity | historical |
|---|---|
| Highly cited | No |