Mr. Dorrance, Chief of the Finance Division, has been a lecturer at the London School of Economics and a member of the staff of the Bank of Canada.
Quarterly Journal of Economics, LX (1940-41), pp. 36-63 (reprinted in American Economic Association, Readings in the Theory of Income Distribution [Philadelphia and Toronto, 1951], from which the citations made here are taken).
Joseph W. Conard, An Introduction to the Theory of Interest (Berkeley and Los Angeles, 1959), p. 290.
There are other opinions regarding the term structure of interest rates. Thus Dudley G. Luckett maintains that any theory of the term structure of rates based on expectations is “incorrect” because it is “in fact, reasoned from an unwarranted assumption to a questionable conclusion” (“Professor Lutz and the Structure of Interest Rates,” Quarterly Journal of Economics, LXIII , p. 131). J. M. Culbertson maintained that there was a basic relation between the rates for different maturities determined by the relative liquidity of short-term and long-term debts, but that the actual structure of rates would be influenced by the relative maturity structure of existing debts (“The Term Structure of Interest Rates,” Quarterly Journal of Economics, LXXI , pp. 485-517).
John Richard Hicks, Value and Capital (Oxford, 2nd ed., 1946).
Ibid., p. 145.
Ibid., pp. 151-52.
Ibid., p. 152.
Op. cit., p. 512.
The designation of one of his two views as the “Hicks” view is partly justified by his reliance on this explanation of the term structure of interest rates in one discussion of the problem (see “Mr. Hawtrey on Bank Rate and the Long-Term Rate of Interest,” The Manchester School, Vol. X, No. 1).
R. S. Sayers, Modern Banking (Oxford, 5th ed., 1960), p. 143.
Ibid., p. 139.
As identified in International Monetary Fund, International Financial Statistics.
Starting with February 1956.
One of the more mystifying statements of the Radcliffe Committee, given the readily available statistical data, is the Committee’s view that “It is sometimes alleged that there is such a hump, but we can discern no pronounced hump for the range of maturities in question…” See Committee on the Working of the Monetary System [Radcliffe Committee], Report (Cmnd. 827, London, August 1959), p. 201.
For example, some of the yield curves reproduced in Bank of Canada, Annual Report of the Governor to the Minister of Finance for the Year 1954 (at p. 8), and for the Year 1957 (at p. 31), are complex curves with more than one hump.
Throughout this presentation, it is assumed that the central bank is the only monetary authority. This assumption is irrelevant to the argument, provided that all the monetary authorities in a country follow consistent policies.
J. R. Hicks, op. cit., p. 164.
D. H. Robertson, “Alternative Theories of the Rate of Interest,” Economic Journal, XLYU (1937), p. 433.
It is recognized that the implementation of certain interest-rate policies may have undesired repercussions leading to a change in the interest levels desired by the authorities (vide the United Kingdom experience in the summer of 1947). However, the possibility that the central bank may change its policy is not of direct relevance to a discussion of the effect of specific decisions determining the level of long and short rates.
Committee on the Working of the Monetary System [Radcliffe Committee], Minutes of Evidence (London, 1960, referred to hereafter as Radcliffe Evidence), pp. 469-78.
H. C. Wallich, “The Current Significance of Liquidity Preference,” Quarterly Journal of Economics, LX (1945-46), p. 493.
Op. cit., p. 42.
“Open Market Operations in Long-Term Securities,” Federal Reserve Bulletin, November 1958, p. 1264.
Committee on the Working of the Monetary System [Radcliffe Committee], Principal Memoranda of Evidence (London, I960), Vol. 2, p. 214.
E.g., Culbertson, op. cit.
Joan Robinson, “The Rate of Interest,” Econometrica, Vol. 19 (1951), p. 102, fn. 20.
“A Rejoinder,” The Manchester School, October 1939, p. 156.
Luckett, op. cit., p. 141.
Radcliffe Evidence, p. 476.
It is recognized that a spread of two points between the current yield and the market consensus is most unlikely to emerge. However, in order to clarify the graphic presentation, the basic argument throughout this exposition is outlined in terms of the rather wide spreads of a 2 per cent short-term rate, a 4 per cent long-term rate, and a 6 per cent market consensus.
Throughout this exposition, all the computations assume that interest is paid and compounded quarterly.
The preceding exposition explained the positive slope of the 4 per cent line. The negative slope of the yield curves, when the central bank sets the yield on 20-year bonds above 6 per cent, can be similarly explained. If the market expects long-term rates to be at the 6 per cent level in the future, and if purchasers now have the opportunity to obtain a yield of more than 6 per cent for 20 years, purchasers will acquire a bond with a maturity of less than 20 years only on condition that they are compensated for the difference in yields over the period from the maturity of the shorter bond to 20 years from the present.
These graphic presentations take the market consensus as a datum. Any effect which the central bank’s policy may have on the consensus is assumed to be already reflected in the given consensus.
No particular significance may be attached to the form of this expectation. It is one of several simple, asymptotic assumptions which might be made. It has been used here primarily because it involves a simple type of expectation.
See above, page 275.
David Meiselman, The Term Structure of Interest Rates (Englewood Cliffs, N. J., 1962).
Ibid., p. 60.
John H. Wood, “An Econometric Model of the Term Structure of Interest Rates,” an as yet unpublished paper, presented to the Econometric Society, Pittsburgh, December 27, 1962.
From Treasury Bulletin, March 1960, p. 58.
Derived from Bank of England, Quarterly Bulletin, December 1961, pp. 58-60.
From Bank of Canada, Annual Report of the Governor to the Minister of Finance for the Year 1957, p. 31.