Saturday, September 14, 2013

Interest and Prices, p.16

Blogging Woodford's classic tome:

The effectiveness of changes in central-bank targets for overnight rates in affecting spending decisions (and hence ultimately pricing and employment decisions) is wholly dependent upont the impact of such actions upon other financial-market prices, such as longer-term interest rates, equity prices, and exchange rates...It is the expected future path of short-term rates over coming months and even years that should matter for the determination of these other asset prices, rather than the current level of short-term rates by itself.  Thus the ability of central banks to influence expenditure, and hence pricing, decisions is critically dependent upon their ability to influence market expectations regarding the future path of overnight interest rates.