Monetary base and public debt: The stock vs. flow effect is a very important question

If the long-term interest rate is determined by the equilibrium between the stock of bonds supplied and the stock of bonds in demand, then the interest rate on OECD country government bonds is likely to remain quite stable and low: first, because the public debt ratio is stable, and second, because the stock of the monetary base (primarily the stock of bonds bought by central banks) is also going to remain more or less stable at a very high level as a percentage of GDP . But if the long-term interest rate is determined by the equilibrium between the flow of bonds issued and bought, then it is likely that the interest rate on long-term government bonds in the OECD will rise significantly, given the persistence of a fiscal deficit and the stabilisation or possible reduction in the monetary base. It is therefore very important to know whether it is the flow effect or the stock effect that chiefly determines long-term interest rates in OECD countries. An econometric analysis seems to show that the stock effect clearly outweighs the flow effect, which suggests that long-term interest rates will remain low.