What do the above trends in the nominal interest rate indicate?
First, the nominal interest rate at the long-end of the market remained fairly strong compared to the rates at the short-end. The difference between the average yield of the 364-day treasury bill and 10 year government bond increased to 3.69 percentage points in 1997-98 from 2.18 percentage points in 1996-97 and 1.13 percentage points in 1995-96. This indicates, to some extent, that the long-term expected inflation and the real interest rate in the economy are higher than those in short-run. We should note that, the prevailing conditions in the secondary markets impose a liquidity premium on government stock in addition to a premium for longer maturities. As markets develop, reduction in liquidity premium will come to a level that will reflect only the premia for the term structure. At that stage, the spreads between the short-term and long-term should narrow and would reflect only premium for maturities. Analytically the long-term rate of interest is the average of the future anticipa
