Reasoning from Interest Rates

A quick note…

We can think of long-term yields as consisting of two components, the average expected future short-term rate and the term premium. However, it is important to note that the average expected future short-term rate itself is a function of the rate of time preference, expectations of future growth, and expectations of inflation. Also, the term premium is a function of duration risk, a liquidity premium, and a safety premium.

So suppose that you see long-term yields change, what can you learn about the stance of monetary policy?

One response to “Reasoning from Interest Rates

  1. Ah, it’s so simple! I hope this is leading to a series of blogs on the details.

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