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In the F9 textbook, in the chapter talking about expectations theory, the following sentence does not make sense. plz can someone explain:
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In the early 1990s, interest rates were high to counteract high inflation.
Everybody expected interest rates to fall in the future, which they did.
Expectations that interest rates would fall meant it was cheaper to
borrow long-term (less attractive) than short-term (more attractive).
“By the way, I understand that if interest rates are EXPECTED to go lower, lets say in five months time, it is less attractive to borrow long term NOW, but why would be cheaper too? How is that that, expectations that interest rates would fall mean it was cheaper to borrow long-term?
It is talking about fixed interest borrowing (long-term borrowing is generally at a fixed interest rate).
If the lender expects that interest rates will fall in the future then the field interest interest rates on longer term borrowing that they quote today will be lower than what they quote for short-term borrowings.
I do make this point in my free lectures.
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