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First of all spending decisions depend more on the

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Unformatted text preview: mittee raised its target for the funds rate to a higher level during the period 2006–07; but financial conditions did not tighten as much as one might expect from the increase in the funds rate. First of all, spending decisions depend more on the level of long-term interest rates, which in turn depend on the expected average level of short rates over the coming decade, rather than the current level of short rates alone. Since there was good reason to regard the low level of the federal federal funds rate in 2003–04 as a temporary anomaly,11 the long rate implied by the expected average future level of the short rates did not greatly increase as a result of the the increase in the funds rate between 2004 and 2006. Moreover, Moreover, yields on long-term Treasury bonds did not rise by even this much. The The term premium, which indicates the amount by which the actual yield on a long-term bond exceeds the expected average level of short-term interest rates over the term to maturity of the bond, declined during this period, as Figure 5 illustrates for the case of a 10-year bond. In turn, the rates at which private parties can borrow are not those applica...
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This note was uploaded on 11/23/2013 for the course ECON 11837649 taught by Professor Batchelder during the Spring '10 term at Pepperdine.

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