What keeps long-term U.S. interest rates so low?

• Short-term interest rate and inflation are the key long run drivers of long-term interest rates.
• In the long run government debt has a negative effect on government bond yields.
• However in the short run government debt has a positive effect on government bond yields.
• The short run effect of debt on long-term interest rates conforms to the conventional wisdom.
• The long run effect of debt on long-term interest rates aligns with charatalist perspectives.
• A model based on Keynes’s ideas is presented to explain the dynamics of government bond yields.

U.S. government indebtedness and fiscal deficits increased notably following the Global Financial Crisis. Yet long-term interest rates and U.S. Treasury yields have remained remarkably low. What keeps long-term interest rates so low? This paper relies on a simple model, based on John Maynard Keynes’ view that the central bank's actions are the key drivers of long-term interest rates, to explain the behavior of long-term interest rates in the U.S. The empirical findings confirm that short-term interest rates are the most important determinants of long-term interest rates in the U.S. Contrary to conventional wisdom, higher government indebtedness has a negative effect on long-term interest rates, particularly on a long run basis. However, in the short run, higher government indebtedness has a positive effect on long-term interest rates. These are relevant for contemporary policy debates and macroeconomic theory.