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Created: 2000-01-13
Last Modified: 20
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Recent Yield Spreads

J. Bradford DeLong

January 2000

from the Economist.

  • The rapid rise in yield spreads suggests a shaky economy in which the price of risk is rising rapidly.
  • If spreads rise too far and too fast, then it will become difficult for monetary policy to stimulate the economy: what matters for the economy and for aggregate demand is the long-term real risky interest rate--a very different animal from the short-term nominal risk-free interest rate that the Federal Reserve controls.
  • The rise in risk premia is good enough reason for the Federal Reserve to lower the interest rates it controls further.
  • Nevertheless, as of mid-January, claims that the economy is sliding into recession are still very premature...

Professor of Economics J. Bradford DeLong, 601 Evans Hall, #3880
University of California at Berkeley
Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax

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