As a result of the rapid development, Which included all aspects of life Whether on the political or economic field , And the emergence of advanced technology , And the openness of the world on some of , And the emergence of economical new concepts such as the free market and the financial markets , multinational companies and many others , Economically new concepts and also the economies of the countries of the world thread , With each other and the emergence of the global economic crisis and fundamental events , Which do not include the country in which it is located only , But it may affect the economic situation of a country , On the economy of a country located on the other side of the world , especially those States to which the growth in the economy and fragile stage, It must therefore be on those countries to put prevention plans to protect its economy, And the business cycle than those effects which may be directly or indirectly .
Therefore we must clarify what are the business cycle and whether the interest rate it has a role, What are the natural relationship between the business cycle and interest rate, In order to achieve a better economic target of the hoped the business cycle, It remained at the top of the business cycle more as possible and
Business cycle or economic cycle: refers to changes in economic activity within a country or countries. The cycle in this sense is defined in terms of economic output, especially the country's gross domestic product (GDP) (the market value of all goods and services produced within the country during a year)(. Marty Schmidt. 2004(
The rate of interest : measures the percentage reward a lender receives for deferring the consumption of resources until a future date. Correspondingly, it measures the price a borrower pays to have resources now. )Malkiel, Burton G. 2008 (.
1- The problem of the study:
The importance of this study of the key role played by the business cycle on the economy Direct and indirect impact on economic growth And a link to the stages of the country's economy These stages reflect the economic situation of the country Therefore governments seek to maintain Two terms of peak and growth , and speed up traffic phases of the recession and the bottom In this study will that is applied to the Jordanian economy To measure the vulnerability and sensitivity of the Jordanian economy from changes Experienced by the business cycle Being a weak economy is affected by any economic change Therefore, the Jordanian government must take the impact of the economic cycle Into account the interest of the factors that affect it Among those factors is the price of interest rate
The problem can be devise through the following question:
What is the role of the interest rate the economic cycle in Jordan?
2-The Study Objectives:
1- Identify the economic cycle in Jordan and see the stages and study the effect of the interest rate it.
2- Identify the associated interest -rate policies that must be applied by the government to get to what it is hoped to maintain a strong economy in light of the volatility of the economic cycle.
3 – Identify the factors influencing the Interest rate in Jordan and try to control.
4- Verify the existence of a relationship between the local interest rate the international interest rate.
3-The questions of the study:
1- Are the stages where the economic cycle impact on the Jordanian economy?
2 – What is the effect of the amount of interest rate the economic cycle in Jordan?
3- What are the associated interest rate policies that must be followed to control the economic cycle in Jordan?
4- The importance of the study:
It can be summed up the importance of this study by identifying the stages The economic cycle And the impact of those stages on the Jordanian economy And then determine the role of interest rate The economic cycle And how you can take advantage Of this role in maintaining A strong economy And determine the best policy for each stage .
5- The study Hypotheses:
The basic hypothesis: Changes which go through the business cycle Impact on the Jordanian economy.
First-sub-hypothesis: Raise the interest rate affects the business cycle In Jordan in a positive or negative (Follow the contractionary policy).
Second-sub-hypothesis: Lower interest rate affects on the business cycle in Jordan in a positive or negative (follow the expansionary policy).
Methodology:
1- Data of the study: The study used data series analysis (annually) dependent and independent variables in the years (1992-2005) from the Central Bank of Jordan.
Literature review:
1- Interest rates and country risk:
In this part of the study we will focus on the relationship of the volatile interest rate With the Jordanian economy and its impact upon.
We will assume this part That there are a number of foreign investors They have the desire to invest in the market of Jordan A specific interest rate R (st) . In contrast, loans to the local economy Are assets for banks high risk because it is assumed that there High probability of non-payment by foreign borrowers. Based on the above there are two reasons for the volatility of interest rate (R): first, Interest rate change is linked to Change the default risk; second, Interest rate change associated Preferences of investors by identifying the most important influences It can be formulated in equation linking them.
1- R(s^t) =R*(s^t) D (s^t)
R*: is foreign interest rate for risky assets.
D: measures the country spread over R∗ paid by borrowers in a particular economy.
The relationship between interest rate and foreign investors Local lender usually pays Their obligations on time, But if the local government has provided loans Foreign investor there are likely to occur Conflicts of interests between the government and local borrowers For the benefit of foreign lender Time variation in this consecration probability will cause time variation in the country spreads D.
2- Firms and technology:
All companies are periodically on the development of the technology used has been forced Get a loan in order to keep pace with the evolution in this way, increase the income Families whose members work in those companies And it can be linked to this relationship through equation derived:
y(s^t) = A ( s^t) [K (s^(t-1) ) ]^∞ [ ( 1 + γ)^t L (s^t) ]^(1-∞ )
A(s^t) = are revealed Labor and capital are hired at the end of the period .
K (s^(t-1) ) = capital in order to maximize profits (measured at time t+).
Y = is the deterministic growth rate of labor-augmenting technological change.
L = the firms problem is to choose labor.
This equation shows the net interest Possible that you get when the company had taken a loan In order to improve its equipment and its impact on the company's capital and on workers' salaries.
What is the definition of the business cycle and why it is important?
Definition:
a business cycle term is refer to the various trends that happened within a business environment or the industry , such as the increase or growth and sometimes the management decisions are effected too by where the firm stands in particular cycle. Business cycle may define as the fluctuation in economic activity over a period of time it is usually in terms of periods of expansion or recession.
Importance of the business cycle:
The business cycle is representation of what happens in the economy in different situation.
The business cycle very useful to help people to understand what happening in the economics around the world.
The business cycle have direct impact on the consumer demand when the level of unemployment and underemployment are high that’s mean consumer have less money to spend on goods and services.
Effects of business cycle on the economy there are many effects of business cycle on the economy such as:
1. Increase in the cost of the borrowing and decreasing of the funds which is caused by the credit crunch.
2. Estimating problem in exchange price rate.
3. Decreasing in house price which is causing negative wealth effect and low of customer spending.
4. Decreasing in investment amount which is caused by the high interest rate.
Past studies:
1- Ivan Tchakarov and SelimElekdag1 , The Role of Interest Rates in Business Cycle Fluctuations in Emerging Market Countries 2006:The role of the interest rate in Thailand in (2006): this study showed that monetary policy in the last years has helped to make an environment of the low interest rate in global capital market, in addition if interest rate take to upward course this will result in less hospitable in financing for emerging market countries.
2- Stephanie Schmitt-Grohe , Martın Uribe C losing small open economy models 2002 : this study show that the number of modification to the model proposed to induce stationary , in addition its make compare of the alternative approaches with five different category, all of the models is deliver virtually identical dynamics at the business cycle frequencies the only differ net between the models that the complete assets market model have smoother consumption.
3-Mohammad Alawin ,Yasmin Al-As’ad JOINT MOVEMENT BETWEEN JORDANIAN AND FOREIGN INTEREST RATES UNDER FIXED EXCHANGE RATE 2013 : study show that the interest rate is one of the most important economic variables and have significant effect on the economy, the relationship between the local and foreign interest rate and the exchange rate between the Jordanian dinar and the us dollars, in addition the role of the relationship between interest rate with the monetary policy.
4- GennaroBernile, George Korniotis, Alok Kumar, and Qin Wang , Local Business Cycles and Local Liquidity 2015 : the study show if the state level economic have condition effects on the local firms by define the liquidity levels of the locals stocks and know if it lower or higher when the local economy has performed well or poorly, in addition show that the this relation become stronger when the local financing constrains become more binding.
5- Andrés Fernández Martín, Adam Gulan Interest Rates and Business Cycles in Emerging Economies 2012: this study show counties interest rates shown in last years to be distinctive characteristic and very important in playing role in driving of the business cycle in emerging market economies most of the business cycle models of the emerging market have relied on ad hoc.
6- S. Tolga Tiryaki Interest Rates and Real Business Cycles in Emerging Markets 2011: this study show that in details the quantitative effects of the interest rate on the business cycle of emerging mart and the real business cycle model in peril and neumeyer addition this study show the result critically depends on the magnitude of the working capital parameter and the persistence of the productivity shocks and the factor shares and its show the importance of the country spreads for the illegal investment and the cyclicality of net exports.
7- Pablo A. Neumeyer , Business cycles in emerging economies The role of interest rates 2004 : this study show that sample of emerging economies business cycle more volatile than developed ones and the real interest rate are country cyclical and lead the cycle , consumption is more volatile than the output and net exports are more strong, in addition in this study the small open economy is explain. The country risk is affected by fundamental shocks by the presence of working capital.
8- Mark Aguiar, Gita Gopinath, Emerging Market Business Cycles: The Cycle Is the Trend 2007: this study show that the Emerging market business cycles exhibit strongly countercyclical current accounts, consumption volatility that exceeds income volatility, and “sudden stops” in capital inflows developed small open economies. Nevertheless, we show that a standard model characterizes both types of markets. Motivated by the frequent policy regime switches observed in emerging markets, our premise is that these economies are subject to substantial volatility in trend growth.
9- Marcelo Sánchez WHAT DRIVES BUSINESS CYCLES AND INTERNATIONAL TRADE IN EMERGING MARKET ECONOMIES 2007:this study show the role of domestic and external factors in explaining business cycle and international trade developments in fifteen emerging market economies. Results from sign restricted VARs show that developments in real output, inflation, real exchange rates and international trade variables are dominated by domestic shocks. External shocks on average explain a fraction of no more than 10% of the variation in the endogenous variables considered. Moreover, real imports fail to display a cross-regional pattern.