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Lecture Financial institutions, instruments and markets (7e): Chapter 13 – Viney, Phillips

In this chapter, you learned to: Describe the macroeconomic context of interest rate determination; explain the loanable funds approach to interest rate determination, including supply and demand variables for loanable funds, equilibrium and the effect of changes in variables on interest rates; understand yields, yield curves and term structures of interest rates, and apply the expectations theory, segmented markets theory and liquidity premium theory; explain the risk structure of interest rates and the impact of default risk on interest rates. | Chapter 13 An introduction to interest rate determination and forecasting Learning objectives Describe the macroeconomic context of interest rate determination Explain the loanable funds approach to interest rate determination, including supply and demand variables for loanable funds, equilibrium and the effect of changes in variables on interest rates Understand yields, yield curves and term structures of interest rates, and apply the expectations theory, segmented markets theory and liquidity premium theory Explain the risk structure of interest rates and the impact of default risk on interest rates Chapter organisation 13.1 Macroeconomic context of interest rate determination 13.2 Loanable funds approach to interest rate determination 13.3 Term structure of interest rates 13.4 Risk Structure of interest rates 13.5 Summary 13.1 Macroeconomic context of interest rate determination In most developed economies monetary policy actions are directed at influencing interest rates By understanding what motivates a central bank in its implementation of interest rates policy: financial market participants can anticipate changes in a government’s interest rate policy lenders and borrowers can make better-informed decisions 13.1 Macroeconomic context of interest rate determination (cont.) A central bank may increase interest rates if there is: inflation above target range excessive growth in GDP a large deficit in the balance of payments rapid growth in credit and debt levels excessive ‘downward’ pressure on FX markets 13.1 Macroeconomic context of interest rate determination (cont.) An increase in interest rates (i.e. tightening of monetary policy) will: eventually increase long-term rates slow consumer spending reducing inflation and demand for imports decrease the size of the current account possibly attract foreign investment, causing the domestic currency to appreciate 13.1 Macroeconomic context of interest rate determination (cont.) Three . | Chapter 13 An introduction to interest rate determination and forecasting Learning objectives Describe the macroeconomic context of interest rate determination Explain the loanable funds approach to interest rate determination, including supply and demand variables for loanable funds, equilibrium and the effect of changes in variables on interest rates Understand yields, yield curves and term structures of interest rates, and apply the expectations theory, segmented markets theory and liquidity premium theory Explain the risk structure of interest rates and the impact of default risk on interest rates Chapter organisation 13.1 Macroeconomic context of interest rate determination 13.2 Loanable funds approach to interest rate determination 13.3 Term structure of interest rates 13.4 Risk Structure of interest rates 13.5 Summary 13.1 Macroeconomic context of interest rate determination In most developed economies monetary policy actions are directed at influencing interest .