Previous empirical work examining the falls in US and UK long-term interest rates over the 2004–2006 period foundfalls in term premia to have played the dominant role.27 Those studies put forward two possible explanations for their finding: lower perceptions of macroeconomic uncertainty or an effect from a “search for yield” in a low interest rate environment. The correlation found here between changes in short interest rate and distant real forward rates suggest that the possibility that monetary policy can affect risk premia should be taken seriously. 27  See Joyce et al (2011), “Understanding the Real Rate Conundrum: An Application of No-Arbitrage Models to the UK Real Yield Curve” and Backus and Wright (2007), “Cracking the Conundrum”. BIS central bankers’ speeches  19
The upsurge of current and capital expenses over this period, financed by the expansion of the state deficit and the growth of public borrowing, affected considerably the economic activity, however in a short-term. Through the twice cuts of the key interest rate and the ongoing injection of liquidity, the monetary policy of the Bank of Albania manifested also a simulating character over 2009 and during the early months of 2010. The monetary conditions at home, under the presence of the exchange rate depreciation during this period, have progressively provided ground to the aggregate demand. However, monetary conditions have been and continue to remain in line with the medium term and long term stability of prices at home, serving also to the well functioning of financial markets and to the maintenance of financial systems stability. BIS Review 50/2010  1  In terms of the respond to the easing monetary policy and to the decrease of risk primes in economy, monetary indicators show improvement signs during the two first months of 2010. A decreasing trend of currency outside banks is materialized and a correspondent growth of deposits in the system. The resulted improvement of liquidity indicators of banking system and the reduction of the demand for funds of public sector are followed by the decrease of Government securities yields. The exchange rate also appears relatively stabilized, reflecting a slight correction of foreign trade indicators and of the country current deficit during the last two quarters.