what explains these substantial fluctuations in interest rates one reason we study f 638222

In the early 1950s, nominal interest rates on three month Treasury bills were about 1% at an annual rate; by 1981, they had reached over 15%, then fell to 3% in 1993, rose above 5% by the mid 1990s, dropped to near 1% in 2003, began rising again to over 5% by 2007, and then fell to zero in 2008. What explains these substantial fluctuations in interest rates? One reason we study financial markets and institutions is to provide some answers to this question. In this chapter we examine why the overall level of nominal interest rates (which we refer to simply as “interest rates”) changes and the factors that influence their behavior. We learned in Chapter 3 that interest rates are negatively related to the price of bonds, so if we can explain why bond prices change, we can also explain why interest rates fluctuate. Here we will apply supply and demand analysis to examine how bond prices and interest rates change.