Hi all,
Why are real default-free interest rates are positively related to the expected volatility of GDP growth?
ty!!
Have you read this from the curriculum? I sincerely don’t remember this explanation somewhere. If affirmative, can you provide the chapter and page please?
Interest rates are inversely related to GDP growth rates. The lower the interest rate (therefore the real interest rate), the higher the growth of the real market, thus GDP. Higher volatility of interest rates would lead to an increase in GDP growth rate volatility, so there the positive relationship goes. A true evidence is that the reference rate (the one the central bank / treasury manipulates…) is stable overtime, I mean little volatility between periods. Economic planners don’t want interest rate volatility, because that leads to GDP growth volatility (which is bad).