Yes, I understand that central banks prefer to operate in
bills and that this means the short market is subject to
different forces. But what I'm asking is, aren't these
market connected via the responses of financial
players? Right now, for example, a 6-month commercial
bill is paying nearly 6%? Does this not impact the willingness
of institutional investors to lend long-term, where the rate
is only 7.5%, but the risks much greater? Does Keynes'
theory of liquidity preference matter? I seem to recall that
back in the mid-90's, when the Fed pushed short-rates up
over 6%, there was a flight to paper and a terrible
credit crunch as a result.
Ellen
[EMAIL PROTECTED] writes:
>In other words, is there financial-market segmentation or is there a
>homogeneous loanable-funds market? An argument for the former, leaving
>aside theoretical considerations such as the capital controversies, is
>that
>central banks and finance ministeries prefer a "bills only" policy.
>
>Edwin (Tom) Dickens
>Ellen Frank wrote:
>>
>> I've never understood the reasoning behind operation twist.
>> Although a drop in long-rates would make it cheaper to
>> borrow and stimulate real spending, a rise in short rates,
>> it seems, would make lenders less willing lend long and finance
>> real investment. The reasoning behind operation twist seems
>> to presume that the long and short markets are unconnected.
>> Am I misunderstanding this?
>>
>> Ellen
>
>
