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
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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