Macroeconomics of Interest Rates

Paper Summary:

This paper discusses the recent economic reports and events with respect to interest rates and interest rate movements. The current state of the US economy is examined as well as the Federal Reserve handling of monetary and fiscal policy relative to the economy. Of particular importance is the Federal Reserve's strategic shift in policy from accommodative to appropriate. The writer concludes that it can be seen that interest rates are much more than one of many economic devices that the Fed has to influence the economy but is actually one of theprimary methods in which the Fed interacts and influences the direction of economic growth and expansion.

Outline:
Abstract
Introduction & Thesis
Overview of Interest Rates
Types of Interest Rates
Impact of Change in Interest Rates
Conclusion

From the Paper:

"Risk structure as it relates to interest rates is essentially the relationship between the interest rates on bonds that have the same term to maturity features. This leads to an active consideration of the default risk which is the chance that a given issuer of a bond may default by not being able to make the interest payments on the bonds at completion of the term or may not be able to meet the face value payment of the bond either. This creates the default risk model which implies that as the risk associated to a bond family increase then interest rates must also increase in order to compensate for the risk premium being incurred. Thus, since corporate bonds are more prone to market failure they typically bear a higher interest rate than government bonds, for example."

Sample of Sources Used:

• Arestis, P., & Sawyer, M. (2004). On the Effectiveness of Monetary Policy and of Fiscal Policy. Review of Social Economy, 62(4), 441+.
• Bartolini, L., Bertola, G., & Prati, A. (2002). Day-to-Day Monetary Policy and the Volatility of the Federal Funds Interest Rate. Journal of Money, Credit & Banking, 34(1), 137+.
• Bliss, R. R. (2001). Market Discipline and Subordinated Debt: A Review of Some Salient Issues. Economic Perspectives, 25(1), 24.
• Cebula, R. J. (2004). Income Tax Evasion Revisited: The Impact of Interest Rate Yields on Tax-Free Municipal Bonds. Southern Economic Journal, 71(2), 418+.
• Tymoigne, E. (2003). Keynes and Commons on Money. Journal of Economic Issues, 37(3), 527+.

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