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Capital Inflows and euro area long-term interest rates
E43 - Determination of Interest Rates; Term Structure of Interest Rates
E44 - Financial Markets and the Macroeconomy
F21 - International Investment; Long-Term Capital Movements
F41 - Open Economy Macroeconomics
G15 - International Financial Markets
Capital flows into the euro area were particularly large in the mid-2000s and the share of foreign holdings of euro area securities increased substantially between the introduction of the euro and the outbreak of the global financial crisis. We show that the increase in foreign holdings of euro area bonds in this period is associated with a reduction of euro area long-term interest rates by about 1.55 percentage points, which is in line with previous studies that document a similar impact of foreign bond buying on US Treasury yields. These results are relevant for understanding developments both in the euro area and abroad, as lower levels of long-term interest rates resulting from foreign accumulation of euro area debt securities may have added to increased risk appetite and hunt for yield at the global level.