« IS/LM with Flexible Prices | Main | Aggregate Demand and Monetary Policy »
September 19, 2006
The Term Structure of Interest Rates
The IS/LM diagram assumes that the short-term and long-term interest rates are the same.
The forward rate:
The forward rate and the expectations hypothesis share some algebra:
Arbitrage pricing establishes the present value formula.
There should be a risk premium separating long-term and short-term bond yields because long-term bonds are inherently riskier.
Posted by bparke at September 19, 2006 04:11 AM