m,t] is the holding-period yield between periods t and t+1 (interest being received at the end of the period) and [R.
2) A well-known logical conundrum arises when the yield curve is inverted, such that the holding-period yield on a short-term asset that furnishes monetary services is greater than the return on a long-term asset that does not furnish monetary services.
All rates of return are stated as annualized, one-month holding-period yields on a bond interest, or 365-day, basis.
The second type of adjustment is to convert an annual effective yield, quoted in percentage points on a bond interest basis, to an annualized one-month holding-period yield on a bond interest basis.
The third type of adjustment is to convert an annual effective yield on a bank interest basis to an annualized one-month holding-period yield on a bond interest basis, a procedure similar to the second one.
In the fourth type of adjustment, we convert a rate quoted on a bank discount basis, for a monetary asset with a maturity of n months, to an annualized one-month holding-period yield.
The following discussion of yield curve adjustment assumes that all own rates (including Treasury bill rates) have been converted to an annualized one-month holding-period yield, on a bond interest basis.
The extent to which domestic monetary policy affects exchange rates--and through exchange rates, the volume of imports and exports--depends on how sensitive investors' desired portfolio allocations are to the difference between expected holding-period yields
2 It is necessary to measure the benchmark rate, R, to construct the Divisia monetary aggregates, and we advocate the use of the upper envelope of the yield-curve-adjusted, holding-period yields
on all of the components in the broadest aggregate.