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- Title
REPLY.
- Authors
Wood, John H.
- Abstract
This article presents the author's response to a comment on his paper about the distinction between elastic and inelastic interest rate expectations. Regressions based upon the simple model advanced in my paper indicated that the responsiveness of forward rates implicit in the Hicksian version of the expectations hypothesis to changes in current one year rates varies negatively with the term of those forward rates up to a term of fourteen years, after which this responsiveness appears positively related to term. If forward rates are composed of two elements, an expected future one-period rate and a liquidity premium, both of which are linearly and positively related to the current one-period rate, if expected one-period rates decline in responsiveness to the current one-period rate as term increases, and if the responsiveness of liquidity premiums to the one-period rate increases as maturity increases, my regression results then imply that the responsiveness of expected rates to current rates dominates changes in liquidity premiums resulting from changes in current rates for short- and intermediate-term securities, but that the relative magnitudes of these responses are reversed for longer-term securities.
- Subjects
INTEREST rates; ELASTICITY (Economics); LIQUIDITY (Economics); SECURITIES; ECONOMICS
- Publication
Quarterly Journal of Economics, 1965, Vol 79, Issue 4, p669
- ISSN
0033-5533
- Publication type
Article
- DOI
10.2307/1880660