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Understanding the Term Structure of Interest Rates

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Mercator posted on Sat, Jun 25 2011 8:15 PM

Ok, elsewhere I sought guidance to understand Hayek's Triangle and the distribution of capital. But this structure of capital is distended and warped by centrally planned interest rate manipulation. In these discussions of how interest rates warp the structure of capital, we only seem to acknowledge one "interest rate" that is the driver.

In real life, we have a whole term structure of interest rates - a 3 month rate , 1 year, 5 year, 30 year rates, and everything in between. How do we account for the terms tructure of interest rates in the influence of the structure of capital?


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The Term Structure of Savings, the Yield Curve, and MaturityMismat


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I would look into Garrison's work on ABCT. (video lectures here).  But for the short answer, you can see here:

Under today's fiat-money regimes, central banks, as a rule, control short-term interest rates. They do so by setting the interest rates on short-term loans extended to commercial banks (typically with maturities of one day, one week, two weeks, or one month).

By determining short-term interest rates, a central bank exerts a strong influence on longer-term interest rates (such as, for instance, 10-year bond yields). The expectation theory of the term structure of interest rates explains why this is the case.[1]


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Thank you for this, but it is taking some time to digest.

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