Re: moore on term structure

[Basil Moore <bmoore@xxxxxxxxxxxx>]

Randy
The conventional story, as i think you know, is there is a positive term
premium, to reflect the fact that lenders wish to lend short, while
borrowers wish to borrow long. There were periods in the 19th C when the
yield curve was negatively sloped, in which case there would be a negative
term premium.

But this is a fudge to make the empirics come out. It makes the theory near
tautological, since it can then never be disproved.
One cannot know the "true ' expectations, and one does not know a priori the
sign or magnitude of the term premium.

For all these reasons i am partial to Per's story, that all asset prices
most importantly depend on expectations of changes in future prices in the
SR, since LT expectations must be so weakly held. Who could hazard a guess
on the value of the ST rate 30 or more years out???

 As you may notice, I don't have any answers!!! Do you??

Alll best  B.




t 02:54 PM 10/7/97 -0600, you wrote:
>basil
>why is the term structure almost always positive (LTr>STr)? do mkts
>almost always expect fed to increase str?
>randy wray
>
>


Basil Moore, Department of Economics
Wesleyan University
685-2363