Most experts agree that, through the manipulation of the short-term interest rates, the central bank can also determine the direction of the long-term interest rates. Some popular thinking alleges that the long-term interest rates are the average of the present and the expected short-term interest rates. Hence, it would appear that the central bank is the key in determining the interest rates. But is this valid?
Individual Time Preferences and Interest Rates
According to thinkers such as Carl Menger and Ludwig von Mises, interest is the outcome of the fact that individuals assign a premium to present goods against identical goods in the future (i.e., time preference). The preference is not the result of capricious behavior but because life in the future is not possible without sustaining it first in the present. On this Carl Menger suggested:
Frank Shostak
Author
Frank Shostak, Ph.D., is an associated scholar of the Mises Institute. His consulting firm, Applied Austrian School Economics, provides in-depth assessments and reports of financial markets and global economies. He has taught at the University of Pretoria and the Graduate Business School at Witwatersrand University.
