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Unformatted text preview: ble to the U.S. Treasury; the figure also shows, for example,
that the spread between the average yield on Baa-rated corporate bonds and 10-year
Treasuries also fell between 2004 and 2006.12 Hence corporate borrowing costs actually
ally fell, despite the increase in the federal funds rate, owing to the declines in the
two spreads! In contrast, the increases in the two spreads during the financial crisis
greatly increased the cost of borrowing.
Even in the case of short-term borrowing, the federal funds rate alone is
not always an adequate measure of money market conditions. Figure 5 also plots
the spread between the three-month U.S. dollar London Interbank Offer Rate 11 For example, see the “fitted” long rates implied by the forecasting model of Kim and Wright (2005).
Indeed, the series plotted in Figure 5 is taken from the estimates of Kim and Wright (2005); their series
is updated at ⟨http://www.federalreserve.gov/econresdata/researchdata.htm⟩.
The spread between yields on this class of moderately...
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