What is the Real Story for Interest Rate Volatility?
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Abstract
What is the source of interest rate volatility? Why do low interest rates precede business cycle booms? Most observers tend to assume that monetary policy is largely responsible for it. Indeed, a standard real business cycle model delivers rather small fluctuations in real interest rates. Here, however, we present two models of the real business cycle variety, in which the fluctuations of real rates are of similar magnitude as in the data, while simultaneously matching salient business cycle facts. The second model also replicates the cyclical behavior of real interest rates.
The models build on recent work by Danthine and Donaldson, Jermann, and Boldrin, Christiano and Fisher. We assume that there are workers and capital owners. The first model posits habit formation and adjustment costs to the stock of capital. The second model assumes that it takes time to plan investment and time to build capital.
© 2019 by Walter de Gruyter Berlin/Boston
Articles in the same Issue
- Foreword
- The Changing Distribution of Income: Evidence and Explanations
- Optimal Policy for Financial Market Liberalizations: Decentralization and Capital Flow Reversals
- What is the Real Story for Interest Rate Volatility?
- Does the P* Model Provide Any Rationale for Monetary Targeting?
- Co-evolution of Preferences and Information in Simple Games of Trust
- General Information
Articles in the same Issue
- Foreword
- The Changing Distribution of Income: Evidence and Explanations
- Optimal Policy for Financial Market Liberalizations: Decentralization and Capital Flow Reversals
- What is the Real Story for Interest Rate Volatility?
- Does the P* Model Provide Any Rationale for Monetary Targeting?
- Co-evolution of Preferences and Information in Simple Games of Trust
- General Information
