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Wiley InterScience | |||||
  German Economic ReviewVolume 1 Issue 1, Pages 43 - 67 Published Online: 25 Feb 2003 © 2010 Verein für Socialpolitik and Blackwell Publishing Ltd Published on behalf of Verein für Socialpolitik
Abstract | Full Text: PDF (Size: 149K) | Related Articles | Citation Tracking  What is the Real Story for Interest Rate Volatility? Copyright Verein fü Socialpolitik and Blackwell Publishers Ltd 2000 ABSTRACTWhat 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. | 
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