Short-Term and Long-Term Interest Pates in a Monetary Model of

This paper analyzes the effects of both anticipated and unanticipated monetary and fiscal disturbances, on the dynamic behavior of a monetary model of a small open economy. It focuses on the adjustment of the short— term and long—term interest rates and the divergence of their transitional paths, particularly in anticipation of these disturbances. The analysis demonstrates how anticipation of a future policy change can generate perverse short—run behavior. The essential reason for the divergence between the short and long rates is that the latter is dominated by long— term expectations, while the former is primarily determined by current influences