The variability short-term and long-term interest rate is a prominent feature of the economy. Interest rates change in response to a variety of economic events, such as changes in federal policy, crises in domestic and international financial markets, and changes in the prospects for long term economics growth and inflation. However, economic events such as these tend to be irregular. There is a more regular variability of interest rate associated with the business cycle, the expansions and contractions that the economy experience overtime.
For example, short-term interest rate rise in expansions and fall in recessions. Long term interest rate do not appear to co-vary much with the level of economic output.
The term cyclical volatility of interest rate refers to the variability of interest rate over periods that correspond to the length of the typical business cycle. In this article, we will example some facts and theory about the cyclical volatility of short-term and long-term interest rate. Why should we care about interest rate volatility? How do short term and long time interest rate behave over the business cycle! What determines the cyclical volatility of interest rate associated with different maturities of government bonds? These questions are important to ask and answer as we seek a fuller understanding of the dynamic of the business cycle in market economic.
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