Re: moore on term structure

[Basil Moore <bmoore@xxxxxxxxxxxx>]

Warren

        Your statement that the CB could commit itself to keep the overnight
rate fixed for 10 years is exactly the point I was trying to make. Fixing a
LT rate requires that expected Av ST rates over the period must equal the LT
rate??  Whenever this is not satisfied, there will be arbitrage opportunities?

        So the CB is constrained in a different way in directly setting the
LT rate, than it is in directly setting the ST rate???

        Basil





05:24 PM 10/10/97 -0400, you wrote:
>
>
>Basil Moore wrote:
>
>> Warren
>>
>>         You have said before that in your opinion the Fed could if it wished
>> control a long rate, e.g. Treas.10 yr.
>>
>
>Yes.
>
>>         My problem with this is that controlling the 10 yr rate implies it
>> must also control all shorter term rates at the same level, in order to
>> satisfy the expectations theory??
>
>It could have, for example, an overnight rate of 5% and a 10 year rate of
6%.Yes,
>there would be arbitrage, but the risk is that the Fed could drop the
>10 year 'peg' at anytime, or change it and/or change the short term rate.
>
>Another option is that the Fed could 'announce' that its overnight target
>would be fixed for 10 years.  The arbs would then keep the 10 year secs
>in line.
>
>Again, I am only showing some of the options the Fed has.
>
>
>>
>
>(snip)
>
>>
>
>
>
>> >Warren
>> >--
>> >Warren B. Mosler
>> >Director of Economic Analysis
>> >III Finance
>> >
>> >See:
>> >
>> >"Soft Currency Economics"
>> >"Full Employment AND Price Stability"
>> >=========================
>> >And related documents:
>> >
>> >http://www.warrenmosler.com
>> >
>> >
>>
>> Basil Moore, Department of Economics
>> Wesleyan University
>> 685-2363
>
>
>
>--
>Warren Mosler
>Director of Economic Analysis
>III Finance
>
>http://www.warrenmosler.com
>
>
>
>


Basil Moore, Department of Economics
Wesleyan University
685-2363