The global stock of central bank money (liquidity) is decreasing: What effect on long-term interest rates?

The global monetary base (the stock of central bank money or liquidity) is declining under the effect of the contraction in the Federal Reserve’s balance sheet, the fall in foreign-exchange reserves in emerging countries and China and the end of quantitative easing in the euro zone. Long-term interest rates (we look at the situation of the United States and the euro zone) depend on the stock of domestic and global liquidity much more than on the flow of new liquidity. We then estimate the effect that the current decline in global liquidity is going to have on long-term interest rates: The US 10-year interest rate will rise by 7 basis points per year; The German 10-year interest rate will rise by 10 basis points per year.