Interest Rate

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INTEREST RATE : An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for deferring the use of funds and instead lending it to the borrower. Interests rates are fundamental to a capitalist society Interest rates are normally expressed as a percentage rate over the period of one year Interest rates targets are also a vital tool of monetary policy and are taken into account when dealing with variables like investment, inflation, and unemployment…..  The economy can be influenced easily by interest rates. When interest rates are high, people do not want to take loans out from the bank because it is more difficult to pay the loans back, and the number of purchases of cars and homes goes down. The opposite is also true.  The effects of a lower interest rate on the economy are very beneficial for the consumer. When interest rates are low, people are more likely to take loans out of the bank in order to pay for things like houses and cars. When the market for those things gets strong, price decreases and more people can purchases these things. This also bodes well for investors, who perceive less risk in taking out a loan and investing it in something because they would have to pay less back to the bank.  When people do not have to spend as much money on bank payments, they have more disposable income to put toward things they want to purchase. Suddenly, a trip to the ice cream store is not so much of a budget crunch and a weekend at the spa seems more doable. These effects, although certainly not direct, are enough to stimulate the market when interest rates are low.  Low interest rates are not beneficial for lenders, who are seeing less of a return on their loan than in times when interest rates are high. This means that banks may find themselves having to lower the interest rates accrued on money deposited in the bank in order to maintain a steady profit. However, interest rates do not really have an effect on how much people save, because an increased amount of disposable income means that they are more likely to spend it than to save it.  When interest rates increase, though, foreign investment can increase because people outside of the country want a larger return for their investment and they are more likely to get it in a state of high interest rates. This causes more demand for the dollar, driving up its value in the international market. The opposite happens, though, when the interest rates are decreased.

 Although much of it is contained within consumers' perception of the economy and their income, interest rates can drive up consumer spending, investment and the amount of loans people take out of the bank. Or they can increase foreign investment

Reasons for interest rate change


Political short-term gain: Lowering interest rates can give the economy a shortrun boost. Under normal conditions, most economists think a cut in interest rates will only give a short term gain in economic activity that will soon be offset by inflation. The quick boost can influence elections. Most economists advocate independent central banks to limit the influence of politics on interest rates.



Deferred consumption: When money is loaned the lender delays spending the money on consumption goods. Since according to time preference theory people prefer goods now to goods later, in a free market there will be a positive interest rate.



Inflationary expectations: Most economies generally exhibit inflation, meaning a given amount of money buys fewer goods in the future than it will now. The borrower needs to compensate the lender for this.



Alternative investments: The lender has a choice between using his money in different investments. If he chooses one, he forgoes the returns from all the others. Different investments effectively compete for funds.



Risks of investment: There is always a risk that the borrower will go bankrupt, abscond, or otherwise default on the loan. This means that a lender generally charges a risk premium to ensure that, across his investments, he is compensated for those that fail.



Liquidity preference: People prefer to have their resources available in a form that can immediately be exchanged, rather than a form that takes time or money to realise.



Taxes: Because some of the gains from interest may be subject to taxes, the lender may insist on a higher rate to make up for this loss..

Open Market Operations in the United States

The effective federal funds rate in the US charted over more than half a century The Federal Reserve (often referred to as 'The Fed') implements monetary policy largely by targeting the federal funds rate. This is the rate that banks charge each other for overnight loans of federal funds, which are the reserves held by banks at the Fed. Open market operations are one tool within monetary policy implemented by the Federal Reserve to steer short-term interest rates. Using the power to buy and sell treasury securities

EFFECTS OF INTEREST RATE ON THE ECONOMY The Interest Rate (IR) is considered as one of the most important economic factors affecting every household, firm and government all over the world. It is, as described by Parkin et al (2005), the opportunity cost of holding money, that is, the price of borrower

are willing to pay for the use of the loan. On the other hand, it is also the compensation to the risk that lenders take in lending the money. (investopedia.com, n.a. 2003) By lenders and borrowers, it refers to individuals, businesses, financial instruments and governments. IR can be also categorized into nominal IR that is the stated one on financial market and real IR that implies the return of investment in terms of value. IR is said to be an indicator of economy situation and reflection of government policy as well. Therefore fluctuations of IR would have great impact on different areas in the economy and it is crucial to understand what determines it and how it would affect the world.

This paper presents a general analysis of models of determinations s of interest rate, which are relevant to the UK economy. Thereafter, the effects of changes in IR to the economy growth will be examined. Then a conclusion will be drawn to generate the key points the paper has mentioned.

Out of all, state of economy is the fundamental parameters of IR. (Toews, 2006) when an economy experiences a growth period, IR is decreased to stimulate the amount of money circulating in the market. Conversely, IR is relatively high when a stagnation or recession occurs.

Figure 1 illustrates the relationship between real GDP which represents the economic grow and IR over 40 years in the UK. In the late 1980s the UK experiencing a huge stagnation period and from the figure the IR was high and the gap between IR and real GDP. During the late 1990s the UK economy were growing and the IR dropped. The observations reveal that a high growth will lead to low interest rate and vise versa

WORLD INTEREST RATE TABLE

MAJOR CENTRAL BANKS OVERVIEW

CENTRAL BANK Bank of Canada Bank of England European Central Bank Federal Reserve Swiss National Bank The Reserve Bank of Australia Bank of Japan Country China Republic of Korea Norway Sweden Brazil

NEXT MEETING Dec 7. 2010 Nov 04 .2010 Nov 04 . 2010 Nov 03 .2010 Dec16 2010 Nov 02 .2010 N/A Current Interest Rate 5.56 % 2.25 % 1.75 % 1.00 % 10.75 %

LAST CHANGE Sep 08 2010 Mar 05 2009 May 07. 2009 Dec 16. 2008 Mar 12 2009 May 04. 2010 Dec 19 2008 Previous 5.31 % 2.00% 1.50 % 0.75 % 10.25 %

CURRENT INTEREST RATE 1% 0.5 % 1% 0.25 % 0.25 % 4.5 % 0.1 % Last Change Oct 19 2010 July 09 2010 Dec 16 2009 Oct 26 2010 July 21 2010

Why interest rates change When interest rates change, it is the result of many complex factors. People who study interest rates find that it is as difficult to forecast future interest rates as it is the weather. Since interest rates reflect human activity, a long-term forecast is virtually impossible. After the

fact, explanations are many and confident! Some of the major factors which help to dictate interest rates are explained below.

Supply and Demand for Funds Interest rates are the price for borrowing money. Interest rates move up and down, reflecting many factors. The most important among these is the supply of funds, available for loans from lenders, and the demand, from borrowers. For example, take the mortgage market. In a period when many people are borrowing money to buy houses, banks and trust companies need to have the funds available to lend. They can get these from their own depositers. The banks pay 6% interest on five year GICs and charge 8% interest on a five year mortgage. If the demand for borrowing is higher than the funds they have available, they can raise their rates or borrow money from other people by issuing bonds to institutions in the "wholesale market". The trouble is, this source of funds is more expensive. Therefore interest rates go up! If the banks and trust companies have lots of money to lend and the housing market is slow, any borrower financing a house will get "special rate discounts" and the lenders will be very competitive, keeping rates low. This happens in the fixed income markets as a whole. In a booming economy, many firms need to borrow funds to expand their plants, finance inventories, and even acquire other firms. Consumers might be buying cars and houses. These keep the "demand for capital" at a high level, and interest rates higher than they otherwise might be. Governments also borrow if they spend more money than they raise in taxes to finance their programs through "deficit financing". How governments spend their money and finance is called "fiscal policy". A high level of government expenditure and borrowing makes it hard for companies and individuals to borrow, this is called the "crowding out" effect.

Monetary Policy Another major factor in interest rate changes is the "monetary policy" of governments. If a government "loosens monetary policy", this means that it has "printed more money". Simply put, the Central Bank creates more money by printing it. This makes interest rates lower, because more money is available to lenders and borrowers alike. If the supply of money is lowered, this "tightens" monetary policy and causes interest rates to rise.

Governments alter the "money supply" to try and manage the economy. The trouble is, no one is quite sure how much money is necessary and how it is actually used once it is available. This causes economists endless debate.

Inflation Another very important factor is inflation. Investors want to preserve the "purchasing power" of their money. If inflation is high and risks going higher, investors will need a higher interest rate to consider lending their money for more than the shortest term. After the very high inflation years of the 1970s and early 1980s, lenders had to receive a very high interest rate compared to inflation to lend their money. As inflation dropped, investors then demanded lower rates as their expectations become lower. Imagine the plight of the long-term bond investor in the high inflation period. After lending money at 5-6%, inflation moved from the 2-3% range to above 12%! The investor was receiving 7% less than inflation, effectively reducing the investor's wealth in real terms by 7% each year!

PAKISTAN ‘S LATEST INTEREST RATE Announcing the bi-monthly Monetary Policy Review, the central bank said the decision to increase the interest rate to 13.5 per cent was taken at a meeting of the central board of directors of the State Bank held under the chairmanship of Governor Shahid Hafeez Kardar. This is Kardar’s first policy announcement since he assumed office earlier this month. The interest rate rise, which will be effective from September 30, caught analysts off guard, many of whom were expecting the central bank to leave the rate unchanged. “The monetary policy stance is formed by the consideration that the impact of continued inflation is substantial and felt by the entire economy,” the SBP said. It said the private sector is bearing the brunt of the interest rate hike because of the difficulty in containing the fiscal deficit. In 2009-10, the fiscal deficit was 6.3 per cent of gross domestic product, substantially higher than the target of 5.1 per cent. This year too, the gap is expected to be above 6 per cent. The bank hinted that further increases in the policy rate may be on the cards. “The next quarter will be crucial in forming an assessment of the effectiveness of government efforts to contain fiscal deficit and its inflationary borrowings from the SBP and the banking system.”

The policy decision manuscript explained that food inflation in recent months spiked beyond historic levels due to the floods. “It may take two or three months for food inflation to return to normal levels,” it added. In its previous policy review at end-July, the central bank had increased the policy rate by 50 basis points to 13 per cent, after an earlier easing was interrupted by spiraling inflation. Although analysts had been expecting stagnation in the policy rate for now, the SBP cited that “in the aftermath of the floods, bringing inflation down to single digit will require a supportive and sustained financial and fiscal effort over the next couple of years.” The bank also said that “to finance the budget deficit the government has increased its reliance on the SBP,” adding there was no commensurate increase in tax revenues for the government to balance its rising expenditures. The bank warned that the federal government’s over-reliance on borrowings from the central bank could mean further monetary tightening in coming months, which will likely raise tempers of an already burdened private sector.

Inflation & Interest Rates
Price Inflation greatly effects time value of money (TVM). It is a major component of interest rates which are at the heart of all TVM calculations. Actual or anticipated changes in the inflation rate cause corresponding changes in interest rates. Lenders know that inflation will erode the value of their money over the term of the loan so they increase the interest rate to compensate for that loss. Figure 2 showed that inflation has been nearly continuous in the U.S. since shortly after World War II. As you can see, long-term loans made at the real rate of interest without an inflation premium would have actually produced negative returns due to the declining purchasing power of the dollar. An estimate of the inflation premium contained in interest rates can be seen by comparing two risk-free securities with the same maturity date, one with a fixed rate and the other with a rate indexed for inflation. The Fed strongly influences short term interest rates with their monetary policy. However, longer term rates are set by the market and reflect an inflation rate which is its current best guess.

Although it may not be a perfect indicator, the yield of a 10 year, fixed-rate U.S.Treasury note when compared with the rate of a Treasury Inflation Protected Security (TIPS) of the same maturity at least shows that some amount of inflation premium certainly does exist. For example, the Fed Funds rate was recently at 1% and the year-to-year percent change in the CPI (current inflation rate) was 2.3%. At the same time, the anual yield of the fixed-rate note was 4.75% while the TIPS note was at 2%. This would indicate that the market currently expects an average annual inflation rate of around 2.75% (4.75% - 2%)

over the ten year period and have added that inflation premium to the fixed-rate, non inflation protected note.

Lower Interest Rates
Ten ways to benefit from low interest rates
1. Pay off any debt you can that is not your mortgage
The golden rule, when you have any spare cash, is always to pay down the most expensive debt first. So if you have credit card debt that is not on a 0pc interest deal, or you have an expensive loan, this should be the first place to put your spare money, if you can.

2. Overpay your mortgage
It may seem a boring way to use your extra cash, but overpaying your mortgage with the extra money you are receiving could yield very significant savings in the long term, as well as possibly allowing you to get better mortgage deals in future.

3. Start a regular savings account
Although interest rates have fallen, some of the best remaining savings rates are reserved for those who are willing to put money away regularly. Even more attractively, some banks are offering fixed rates on their regular savings, meaning that your money will not suffer from falling interest rates.

4. Drip feed it into investments
The stock market has taken a pounding over recent months, and whether you want to dip a toe into its choppy waters depends on your own feelings about its fragility. However, experts continually advise that the best way to take advantage of a market downturn is to regularly put money into a fund or into stocks that you like – rather than trying to guess the bottom of the market.

5. Take out payment protection insurance
If you fear that if you lose your job you could also lose your home, your mortgage windfall could buy you some peace of mind. Payment protection insurance (PPI), traditionally sold with loans and credit cards, has not always been a popular product, with fines for mis-selling rife. However, it is possible to insure your income for up to 12 months in the event of redundancy using a stand-alone product.

6. Save for your children's future
Thanks to Gordon Brown, every child born since 2002 has their very own trust fund, started off with a £250 voucher from the Government. The vast majority of these are stakeholder funds, which are invested in equities. Your child's account may have had a torrid time over the past few months, but the principle of regular savings adding up over the long term still applies. Over nearly all 18year periods in history, investing in equities has outperformed money in a deposit account, and since your child cannot access this money until they are 18 there is plenty of time to take a long-term view.

7 . Take Account of Pension
Savers looking further into the future might want to use the windfall to add to their pension contributions – another way to get their money away from the taxman. Saving £120 a month into a pension is unlikely to produce life-changing amounts of money for a 55-year-old starting to save now (although it will make a difference), but for a 35-year-old the difference could be more impressive. According to Legal & General's stakeholder pension calculators, a 35-year-old man putting £120 a month into a pension could end up with an income of £212 a month in retirement at 65

8. Buy a health cashplan
Health cashplans are different from more expensive health insurance – but they could be a good buy if you regularly pay to have your eyes tested and to go to the dentist. They will also provide backup for other more expensive procedures. With a cashplan, you arrange for the treatment yourself and pay the money. Then you send the plan provider a claim form and your receipt and it will pay you back some or all of the cost for that treatment.

9. Prepay your children's school fees
If you are planning to pay for private education for a child or grandchild, it pays to start early. You could put your extra money into a savings plan to help with costs in the future. If your child is already in a private school, many will let you pay the fees in advance, which could also insulate you against later rises in fees

10. Spend the lot to stimulate the economy
Here's Gordon Brown's preferred option. That £120 a month extra could give the economy a much-needed fillip if you went out and spent it on Britain's high streets. A couple of lattes and an expensive meal out suddenly seem like the charitable thing to do.

And it might make you feel better in the short term. On the other hand, the options above are likely to benefit your family better if times really get tough. And you can't save the economy single-handed, you know..

IMPACTS OF HIGHER INTEREST RATES

Higher interest rates have various economic effects: 1. Increases the cost of borrowing. Interest payments on credit cards and loans are more expensive. Therefore this discourages people from borrowing and saving. People who already have loans will have less disposable income because they spend more on interest payments. Therefore other areas of consumption will fall. 2. Increase in mortgage interest payments. Related to the first point is the fact that interest payments on variable mortgages will increase. This will have a big impact on consumer spending. This is because a 0. 5% increase in interest rates can increase the cost of a £100,000 mortgage by £60 per month. This is a significant impact on personal disposable income. 3. Increased incentive to save rather than spend. Higher interest rates make it more attractive to save in a deposit account because of the interest gained. 4. Higher interest rates increase the value of £ (due to hot money flows. Investors are more likely to save in British banks if UK rates are higher than other countries) A stronger Pound makes UK exports less competitive - reducing exports and increasing imports. This has the effect of reducing Aggregate demand in the economy. 5. Rising interest rates affect both consumers and firms. Therefore the economy is likely to experience falls in consumption and investment. 6. Government debt interest payments increase. The UK currently pays over £23bn a year on its own national debt. Higher interest rates increase the cost of government interest payments. This could lead to higher taxes in the future. 7. Reduced Confidence. Interest rates have an effect on consumer and business confidence. A rise in interest rates discourages investment; it makes firms and consumers less willing to take out risky investments and purchases.

Evaluation


It effects people in different ways. The effect of higher interest rates does not affect each consumer equally. Those consumers with large mortgages (often first time buyers in the 20s and 30s) will be disproportionately affected by rising interest rates. For example, reducing inflation may require interest rates to rise to







a level that cause real hardship to those with large mortgages. This makes monetary policy less effective as a macro economic tool. Time lags. The effect of rising interest rates can often take up to 18 months to have an effect. For exampl,e if you have an investment project 50% completed, you are likely to finish it off. However, the higher interest rates may discourage starting a new project in the next year. It depends upon other variables in the economy. At times, a rise in interest rates may have less impact on reducing the growth of consumer spending. For example, if house prices continue to rise very quickly, people may feel that there is a real incentive to keep spending despite the rise in interest rates. Real Interest Rate. It is worth bearing in mind that what is important is the real interest rate. The real interest rate is nominal interest rates minus inflation. Thus if interest rates rose from 5% to 6% but inflation rose from 2% to 5.5 %. This actually represents a cut in real interest rates from 3% (5-2) to 0.5% (6-5.5) Thus in this circumstance the rise in nominal interest rates actually represents expansionary monetary policy..

Industry
Main article: Industry of Pakistan

Manufacturing by Province
Pakistan's two leading companies, as per Forbes Global 2000 ranking for 2005. Template:Inote Global ranking 1,284 1,316

Company Name

Oil & Gas Development PTCL

Forbes Global 2010

Pakistan ranks forty-first in the world and fifty-fifth worldwide in factory output. Pakistan's industrial sector accounts for about 24% of GDP. Cotton textile production and apparel manufacturing are Pakistan's largest industries, accounting for about 66% of the merchandise exports and almost 40% of the employed labour force. Other major industries include cement, fertilizer, edible oil, sugar, steel, tobacco, chemicals, machinery, and food processing. The government is privatizing large-scale parastatal units, and the public sector accounts for a shrinking proportion of industrial output, while growth in overall industrial output (including the private sector) has accelerated. Government policies aim to diversify the country's industrial base and bolster export industries.


• •

Industries: textiles (8.5% of the GDP), fertilizer, cement, oil refineries, dairy products,food processing, beverages, construction materials, clothing, paper products, shrimp Industrial production growth rate: 6% (2005) Large-scale manufacturing growth rate: 19.9% (2005)

Automobile industry
Pakistan is an emerging market for automobiles and automotive parts offers immense business and investment opportunities. The total contribution of Auto industry to GDP in 2007 is 2.8% which is likely to increase up to 5.6% in the next 5 years. Auto sector presently, contributes 16% to the manufacturing sector which also is expected to increase 25% in the next 7 years. Car ownership in Pakistan has risen by 40% per annum since 2001.

CNG industry
As of 2009, Pakistan is one of the largest users of CNG (compressed natural gas) in the world. Presently, more than 2,900 CNG stations are operating in the country in 85 cities and towns, and 1000 more would be set up in the next three years. It has provided employment to over 50,000 people in Pakistan.

Cement industry
In 1947, Pakistan had inherited four cement plants with a total capacity of 0.5 million tons. Some expansion took place in 1956–66 but could not keep pace with the economic development and the country had to resort to imports of cement in 1976-77 and continued to do so till 1994-95. The cement sector comprising of 27 plants is contributing above Rs 30 billion to the national exchequer in the form of taxes.

IT industry
Pakistan’s IT industry has been rising steadily since the last three years. A marked increase in software export figures are an indication of this booming industry’s potential. The total number of IT companies increased to 1306 and the total estimated size of IT industry is $2.8 billion. In 2007, Pakistan was for the first time featured in the Global Services Location Index by A.T. Kearney and was rated as the 30th best location for offshoring By 2009, Pakistan had improved its rank by ten places to reach 20th. Furthermore, Pakistan has 19 million internet users and 2.3 million facebook users.

Textiles
The Textile Industry is dominated by Punjab. 3% of United States imports regarding clothing and other form of textiles is covered by Pakistan. Textile exports in 1999 were $5.2 billion and rose to become $10.5 billion by 2007. Textile exports managed to increase at a very decent growth of 16% in 2006. In the period July 2007 – June 2008, textile exports were US$10.62 billion. Textile exports share in total export of Pakistan has declined from 67% in 1997 to 55% in 2008, as exports of other textile sectors grew.

Mining
Pakistan is endowed with significant mineral resources and emerging as a very promising area for prospecting/exploration of mineral deposits. Bases on available information, the country's more than 6,00,000 km² of outcrops area demonstrates varied geological potential for metallic and non-metallic mineral deposits. Except oil, gas and nuclear minerals regulated at federal level, Minerals are a provincial subject, under the constitution of Islamic Republic of Pakistan. Provincial governments are responsible for development and exploitation of minerals, besides, enforcing regulatory regime. In line with the constitutional framework the federal and provincial governments have jointly set out Pakistan first National Mineral Policy in 1995, duly implemented by the provinces, providing appropriate institutional and regulatory framework and equitable and internationally competitive fiscal regime. In the recent past, exploration by government agencies as well as by multinational mining companies presents ample evidence of the occurrences of sizeable minerals deposits. Recent discoveries of a thick oxidized zone underlain by sulphide zones in the shield area of the Punjab province, covered by thick alluvial cover have opened new vistas for metallic minerals exploration. Pakistan has large base for industrial minerals. The discovery of coal deposits having over 175 billion tones of reserves at Thar in the Sindh province has given an impetus to develop it as an alternate source of energy. There is vast potential for precious and dimension stones. The enforcement of Mineral Policy (1995) has paved way to expand mining sector activities and attract international investment in this sector. International mining companies have responded favorably to the NMP and presently at least four are engaged in mineral projects development.

Currently about 52 minerals are under exploitation although on small scale. The major production is of coal, rock salt and other industrial and construction minerals. The current contribution of mineral sector to the GDB is about 0.5% and likely to increase considerably on the development and commercial exploitation of Saindak & Reco Diq copper and gold deposits (world largest gold mine), Duddar zinc lead, Thar coal and gemstone deposits.

Effects of interest rate on the investors/industrialist of Pakistan
A lower interest has a positive impact on the industrial development b/c the Investor gets loan from the banks at a lower rate & invests in different industries. Inversely a higher interest rate discourages investors from taking loan b/c they have to pay higher rate when they return the loan.. A low interest rate is suitable for the industrial development.

How can a central bank control Interest Rate
Essentially, the term “interest rates” stands for a monetary compensation, usually expressed in a percentage per annum. The lender of the fiscal amount is compensated for the loss that he or she suffers – the owner of the money may invest them and thus generate income instead of lending funds to the borrower. One of the ways a central bank (or a reserve bank or other monetary authority) may control interest rates is by open market operations. A central bank may indirectly intervene in the economy of its country or union of states by buying government securities. By purchases, the bank raises the price of the securities on the open market, thus lowering their rates and the interest rates in general. The interest rates may be modified directly by the respective monetary institution, as well. After all, interest rates are just tools of monetary policy and may be used to curb variables like investment and inflation. Historically speaking, interest rates have been governed by national governments or central banks. The Fed’s federal funds rate in the US has fluctuated from 0.25% to 19% for the period between 1954 and 2008. Variations in the base rate of the Bank of England from 1989 to 2009 measured from lowest 0.5% to a high of 15%. But for the layman’s mind, it is noteworthy to point out that the generally referred to (in media) as interest rate is the annualized rate offered by a respective central bank on overnight deposits.

As a matter of fact, there are some authors such as Daniel L. Thornton, from Federal Reserve Bank of St. Louis, who argue that “it is money that matters and interest rates does not”, due to the perceived virtuality of the interbank interest rates. Further Thornton points out that monetary policy is at present conducted by targeting short-term interest rates. The banking authorities undertake to manage the price level by manipulating aggregate demand while fixing their targeted interest rate. So, the aforementioned author claims that money’s role is at best tertiary. Even more, the author points out that according to some other renowned economists, money is probably irrelevant in the determination of the price level. But the author of the working paper argues against these macroeconomists, claiming that the most prominent feature of money is its ability to warrant “final payment”. He also suggests that the central banks’ ability to control interest rates may be overtly exaggerated. The author reports that according to Friedman (1999) “a widely shared opinion today is that central banks need not actually do anything. With a clear enough statement of intentions, ‘the markets will do all of the work for them’ as far as controlling the funds rates in view of the target for the funds rate is concerned (funds rate = the interest rate at which a depository institution lends available funds straightforward to another depository for the overnight). The author further clarifies the EH (expectations hypothesis), stating that “a longer-term rate is equal to the average of the current and expected future shortterm rate”. Then, he concludes that this hypothesis would mean, if true, that all rates would be linked with the overnight rate; but the aforementioned hypothesis has been proven wrong numerous times by authors such as Campbell and Shiller, Cochrane and Piazzesi, and Thornton himself. The apparent erroneousness of the EH proposition gives ground to deeply doubt FED's means of controlling the interest rates by applying the apparatus of the expectations hypothesis.

CONCLUSION

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