Globalization's Effect on Interest Rates and the Yield Curve

This reading, "Globalization's Effect on Interest Rates and the Yield Curve." examines the failure of long-term bond interest rates to rise during the period from June 2004 to July 2006 when the Federal Open Market Committee steadily increased the target federal funds interest rate from 1 percent to 5.25 percent. The real and financial effects of globalization explain the disconnect that occurred between short- and long-term interest rates and are likely to weaken the impact of monetary policy in the future.

1. Define the following terms used in the reading:
   1. interest-rate conundrum
   2. yield curve
   3. risk premium

2. What puzzle motivates the analysis of long-term bond interest rates presented in this reading? Why is this puzzle significant for monetary policy?
3. According to Wu, what four factors determine the interest rate on bonds? How has globalization influenced each of these factors?
4. How did globalization affect long-term bond interest rates during the period under study in this reading? What impact did this have on the yield curve? Why would investors note this change in the yield curve?
5. Does Wu conclude that continuing globalization will be more likely to strengthen or weaken a central bank's ability to conduct monetary policy? Why?

Source: "Globalization’s Effect on Interest Rates and the Yield Curve." Tao Wu, Economic Letter 1(9), Federal Reserve Bank of Dallas, September 2006.