BRIEF ANALYSIS OF MONEY & CAPITAL MARKETS IN THE UNITED STATES FOR THE FIVE-YEARS PERIOD 1995-1999 INCLUSIVE
This research examines the money and capital markets in the United States for the five-year period 1995-1999 inclusive. As a part of this examination underlying reasons for shifts in interest rates and interest rate differentials are sought.
Several factors, including global market forces, the current and expected rates of inflation, and Federal Reserve implemented monetary policy, affect the demand for and supply of money in the economy. The demand for and the supply of money, in turn, affects interest rates and interest rate differentials, and, in turn, the demand for and the supply of money are affected by interest rates and interest rate differentials. Thus, the relationships between interest rates and interest rate differentials, on one hand, and the demand for and the supply of money, on the other hand, are very much interactive in character (Pansard, 1999).
Short-term interest rates are affected by the actions of both the Federal Reserve and other market participants in the money and capital markets. The Federal Reserve, through the development and application of monetary policy, influences short-term interest rates by setting the rate of interest that it charges banks for borrowing from the Federal Reserve and by setting the rate at which banks borrow from one another (Soderlind & Svensson, 1997).
The interest rates set by the Federal Reserve, thus, serve as indicators of future movements in interest rates generally and especially for short-term interest rates. On the other hand, long-term interest rates are affected more by the expectations of investors participating in the capital markets. If investors believe that inflation will increase in the future, they will demand a higher return on their investments, thereby causing long-term interest rates to increase (Renshaw, 1997).
While interest rates i...