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Relevant bibliographies by topics / Interest rate models

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Academic literature on the topic 'Interest rate models'

Author: Grafiati

Published: 4 June 2021

Last updated: 8 June 2024

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Journal articles on the topic "Interest rate models"

1

Paseka, Alex, Theodoro Koulis, and Aerambamoorthy Thavaneswaran. "Interest Rate Models." Journal of Mathematical Finance 02, no. 02 (2012): 141–58. http://dx.doi.org/10.4236/jmf.2012.22016.

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Hagan, Patrick S., and Diana E. Woodward. "Markov interest rate models." Applied Mathematical Finance 6, no. 4 (December 1999): 233–60. http://dx.doi.org/10.1080/13504869950079275.

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Ho, Thomas S. Y. "Evolution of Interest Rate Models." Journal of Derivatives 2, no. 4 (May 31, 1995): 9–20. http://dx.doi.org/10.3905/jod.1995.407923.

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BRODY, DORJE C., and STALA HADJIPETRI. "COHERENT CHAOS INTEREST-RATE MODELS." International Journal of Theoretical and Applied Finance 18, no. 03 (May 2015): 1550016. http://dx.doi.org/10.1142/s0219024915500168.

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The Wiener chaos approach to interest-rate modeling arises from the observation that in the general context of an arbitrage-free model with a Brownian filtration, the pricing kernel admits a representation in terms of the conditional variance of a square-integrable generator, which in turn admits a chaos expansion. When the expansion coefficients of the random generator factorize into multiple copies of a single function, the resulting interest-rate model is called "coherent", whereas a generic interest-rate model is necessarily "incoherent". Coherent representations are of fundamental importance because an incoherent generator can always be expressed as a linear superposition of coherent elements. This property is exploited to derive general expressions for the pricing kernel and the associated bond price and short rate processes in the case of a generic nth order chaos model, for each n ∈ ℕ. Pricing formulae for bond options and swaptions are obtained in closed form for a number of examples. An explicit representation for the pricing kernel of a generic incoherent model is then obtained by use of the underlying coherent elements. Finally, finite-dimensional realizations of coherent chaos models are investigated and we show that a class of highly tractable models can be constructed having the characteristic feature that the discount bond price is given by a piecewise-flat (simple) process.

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Hunt, Phil, Joanne Kennedy, and Antoon Pelsser. "Markov-functional interest rate models." Finance and Stochastics 4, no. 4 (August 2000): 391–408. http://dx.doi.org/10.1007/pl00013525.

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Hunt, P. J., and J. E. Kennedy. "Implied interest rate pricing models." Finance and Stochastics 2, no. 3 (May 1, 1998): 275–93. http://dx.doi.org/10.1007/s007800050041.

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Zhu, You-Lan. "Three-factor interest rate models." Communications in Mathematical Sciences 1, no. 3 (2003): 557–73. http://dx.doi.org/10.4310/cms.2003.v1.n3.a8.

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Boyle, Phelim P., and Weidong Tian. "Quadratic Interest Rate Models as Approximations to Effective Rate Models." Journal of Fixed Income 9, no. 3 (December 31, 1999): 69–80. http://dx.doi.org/10.3905/jfi.1999.319221.

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Tse, Y. K. "Short-term interest rate models and generation of interest rate scenarios." Mathematics and Computers in Simulation 43, no. 3-6 (March 1997): 475–80. http://dx.doi.org/10.1016/s0378-4754(97)00034-7.

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Moh, Young-Kyu, and Yeongseop Rhee. "Continuous-time Interest Rate Differential Models." INTERNATIONAL BUSINESS REVIEW 20, no. 2 (June 30, 2016): 27. http://dx.doi.org/10.21739/ibr.2016.06.20.2.27.

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Dissertations / Theses on the topic "Interest rate models"

1

Unal, Birol. "Interest rate term structure models." Thesis, Imperial College London, 2003. http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.407078.

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Hansen, Oyvind Grande. "Multifactor Interest Rate Models in Low-Rate Environments." Thesis, Norges teknisk-naturvitenskapelige universitet, Institutt for fysikk, 2013. http://urn.kb.se/resolve?urn=urn:nbn:no:ntnu:diva-22624.

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This thesis studies a multi-factor Heath-Jarrow-Morton model and a LIBOR mar-ket model on the Norwegian, European and US interest rate market. The mainconcerns are the low-rate environment and exposure to negative interest rates inthese models. We begin by introducing financial markets and the mathematicalmodels explaining them. Further we discuss the problem with the current low-rateenvironment and the historical market practice. The focuses are implementationsof two multi-factor interest rate models and the presence of negative interest rates.The historical data is provided by DNB and consists of zero coupon swap rates forseveral maturities in the period 2000-2012. The volatility factors are derived fromhistorical data using principal component analysis and covariance matrices. Withtoday?s yield curve the probability of negative rates is highly significant in the HJMmodel, whereas it is zero in LMM because of lognormality. Monte Carlo is used onthe models to compare prices of caps and floors. We show that the models do notproduce the same price especially around strikes near the current 3-month rates.Further we price long butterfly spreads to show the absence of arbitrage in bothmodels.

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Ziervogel, Graham. "Hedging performance of interest-rate models." Master's thesis, University of Cape Town, 2016. http://hdl.handle.net/11427/20482.

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This dissertation is a hedging back-study which assesses the effectiveness of interest- rate modelling and the hedging of interest-rate derivatives. Caps that trade in the Johannesburg swap market are hedged using two short-rate models, namely the Hull and White (1990) one-factor model and the subsequent Hull and White (1994) two-factor extension. This is achieved by using the equivalent Gaussian additive-factor models (G1++ and G2++) outlined by Brigo and Mercurio (2007). The hedges are constructed using different combinations of theoretical zero-coupon bonds. A flexible factor hedging method is proposed by the author and the bucket hedging technique detailed by Driessen, Klaasen and Melenberg (2003) is tested. The results obtained support the claims made by Gupta and Subrahmanyam (2005), Fan, Gupta and Ritchken (2007) and others in the literature that multi-factor models outperform one-factor models in hedging interest-rate derivatives. It is also shown that the choice of hedge instruments can significantly influence hedge performance. Notably, a larger set of hedge instruments and the use of hedge instruments with the same maturity as the derivative improve hedging accuracy. However, no evidence to support the finding of Driessen et al. (2003) that a larger set of hedge instruments can remove the need for a multi-factor model is found.

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Trovato, Manlio Battaglia. "Interest rate models with Markov chains." Thesis, Imperial College London, 2009. http://hdl.handle.net/10044/1/8805.

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Elhouar, Mikael. "Essays on interest rate theory." Doctoral thesis, Handelshögskolan i Stockholm, Finansiell Ekonomi (FI), 2008. http://urn.kb.se/resolve?urn=urn:nbn:se:hhs:diva-451.

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Al-Zoubi, Haitham. "New Evidence on Interest Rate and Foreign Exchange Rate Modeling." ScholarWorks@UNO, 2003. http://scholarworks.uno.edu/td/467.

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This dissertation empirically and theoretically investigates three interrelated issues of market anomalies in interest rates derivatives and foreign exchange rates. The first essay models the spot exchange rate as a decomposition of permanent and transitory components. Unlike extant analysis, the transitory component could be stationary or explosive. The second essay examines the market efficiency hypothesis in the foreign exchange markets and relates the rejection of forward rate unbiasedness hypothesis to the existence of risk premium not to the failure of rational expectation. The third essay examines the behavior of short-term riskless rate and models the risk free rate as a nonlinear trend stationary process. While addressing these issues, these essays account for: (1) finite sample bias; (2) Unit root and other nonstationary behaviors; (3) the role of nonlinear trend; and (4) the interrelations between different behaviors. Several new results have been gleaned from our analysis; we find that: (1) the spot exchange rates display a very slow mean aversion behavior, which implies the failure of the purchasing power parity; (2) there are positive autocorrelations across the long horizons overlapping returns increases overtime and then begin to decline at a very long horizon period; (3) the short-term riskless rate displays a nonlinear trend stationary process which is closer to driftless random walk behavior; (4) modifying the mean reverting shortterm interest rates models to a nonlinear trend stationary shows an extreme improvement and outperforms all suggested models; (5) the traditional tests for rational expectations and market efficiency in the foreign exchange markets are subject to size distortions; (6) we relate the rejection of market efficiency in the foreign exchange markets documented across most currencies to the existence of risk premium not to the rejection of rational expectation hypothesis.

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Mbongo, Nkounga Jeffrey Ted Johnattan. "Building Interest Rate Curves and SABR Model Calibration." Thesis, Stellenbosch : Stellenbosch University, 2015. http://hdl.handle.net/10019.1/96965.

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Thesis (MSc)--Stellenbosch University
ENGLISH ABSTRACT : In this thesis, we first review the traditional pre-credit crunch approach that considers a single curve to consistently price all instruments. We review the theoretical pricing framework and introduce pricing formulas for plain vanilla interest rate derivatives. We then review the curve construction methodologies (bootstrapping and global methods) to build an interest rate curve using the instruments described previously as inputs. Second, we extend this work in the modern post-credit framework. Third, we review the calibration of the SABR model. Finally we present applications that use interest rate curves and SABR model: stripping implied volatilities, transforming the market observed smile (given quotes for standard tenors) to non-standard tenors (or inversely) and calibrating the market volatility smile coherently with the new market evidences.
AFRIKAANSE OPSOMMING : Geen Afrikaanse opsomming geskikbaar nie

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Vocke, Carsten. "Hedging with multi-factor interest rate models /." [St. Gallen] : [s.n.], 2005. http://www.gbv.de/dms/zbw/503121223.pdf.

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Iqbal, Adam Saeed. "Dynamic interest rate and credit risk models." Thesis, Imperial College London, 2011. http://hdl.handle.net/10044/1/6851.

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This thesis studies the pricing of Treasury bonds, the pricing of corporate bonds and the modelling of portfolios of defaultable debt. By drawing on the related literature, Chapter 1 provides economic background and motivation for the study of each of these topics. Chapter 2 studies the use of Gaussian affine dynamic term structure models (GDTSMs) for forming forecasts of Treasury yields and conditional decompositions of the yield curve into expectation and risk premium components. Specifically, it proposes market prices of risk that can generate bond price time series that are consistent with the important empirical result of Cochrane and Piazzesi (2005), that a linear combination of forward rates can forecast excess returns to bonds. Since the GDTSM here falls into the essentially affine class (Duffee (2002)), it is analytically tractable. Chapter 3 studies conditional risk premia in a commonly applied default intensity based model for pricing corporate bonds. Here, I refer to such models as completely affine defaultable dynamic term structure models (DDTSMs). There are two main contributions. First, I show that completely affine DDTSMs imply that the compensation for the risk associated with shocks to default intensities (the credit spread risk premium) is related to the volatility of default intensities. Second, I run regressions to show that this relationship holds in a set of corporate bond data. Finally, Chapter 4 proposes a new dynamic model for default rates in large debt port- folios. The model is similar in principle to Duffie, Saita, and Wang (2007) and Duffie, Eckner, Horel, and Saita (2009) in that the default intensity depends on the observed macroeconomic state and unobserved frailty variables. However, the model is designed for use with more commonly available aggregate, rather than individual, default data. Fitting the model to aggregate charge-off rates in US corporate, real-estate and non- mortgage retail sectors, it is found that interest rates, industrial production and unemployment rates have quantitatively plausible effects on aggregate default rates.

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O???Brien, Peter Banking &amp Finance Australian School of Business UNSW. "Term structure modelling and the dynamics of Australian interest rates." Awarded by:University of New South Wales. School of Banking and Finance, 2006. http://handle.unsw.edu.au/1959.4/28283.

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This thesis consists of two related parts. In the first part we conduct an empirical examination of the dynamics of Australian interest rates of six different maturities, covering the whole yield curve. This direct study of the long rates is quite novel. We use maximum likelihood estimation on a variety of models and find some results that are in stark contrast to previous studies. We estimate Poisson-jump diffusion (PJD) models and find very strong evidence for the existence of jumps in all daily interest rate series. We find that the PJD model fits short-rate data significantly better than a Bernoulli-jump diffusion model. We also estimate the CKLS model for our data and find that the only model not rejected for all six maturities is the CEV model in stark contrast to previous findings. Also, we find that the elasticity of variance estimate in the CKLS model is much higher for the short-rates than for the longer rates where the estimate is only about 0.25, indicating that different dynamics seem to be at work for different maturities. We also found that adding jumps to the simple diffusion model gives a larger improvement than comes from going from the simple diffusion to the CKLS model. In the second part of the thesis we examine the Flesaker and Hughston (FH) term structure model. We derive the dynamics of the short rate under both the original measure and the risk-neutral measure, and show that some criticisms of the bounds for the short rate may not be significant in actual applications. We also derive the dynamics of bond prices in the FH model and compare them to the HJM model. We also extend the FH model by allowing the martingale to follow a jump-diffusion process, rather than just a diffusion process. We derive the unique change of measure that guarantees the family of bond prices is arbitrage-free. We derive prices for caps and swaptions, and extend the results to include Bermudan swaptions and show how to price options with the jump-diffusion version of the FH model.

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Books on the topic "Interest rate models"

1

Cairns, Andrew. Interest rate models: An introduction. Princeton, NJ: Princeton University Press, 2003.

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Interest rate models: An introduction. Princeton, NJ: Princeton University Press, 2004.

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Interest rate modelling. New York: Palgrave Macmillan, 2004.

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Interest-rate option models: Understanding, analysing and using models for exotic interest-rate options. 2nd ed. Chichester: Wiley, 1998.

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Interest-rate option models: Understanding, analysing and using models for exotic interest-rate options. Chichester: Wiley, 1996.

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V, Piterbarg Vladimir, ed. Interest rate modeling. London: Atlantic Financial Press, 2010.

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Brigo, Damiano, and Fabio Mercurio. Interest Rate Models Theory and Practice. Berlin, Heidelberg: Springer Berlin Heidelberg, 2001. http://dx.doi.org/10.1007/978-3-662-04553-4.

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Brooks, Robert Edwin. Interest rate modeling and the risk premiums in interest rate swaps. Charlottesville, Va., U.S.A: Research Foundation of the Institute of Chartered Financial Analysts, 1997.

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Bernanke, Ben. On the predictive power of interest rates and interest rate spreads. Cambridge, MA: National Bureau of Economic Research, 1990.

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Benhabib, Jess. Backward-looking interest-rate rules, interest-rate smoothing, and macroeconomic instability. Cambridge, Mass: National Bureau of Economic Research, 2003.

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Book chapters on the topic "Interest rate models"

1

Koller, Michael. "Interest Rate." In Stochastic Models in Life Insurance, 21–28. Berlin, Heidelberg: Springer Berlin Heidelberg, 2012. http://dx.doi.org/10.1007/978-3-642-28439-7_3.

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Hassler, Uwe. "Interest Rate Models." In Stochastic Processes and Calculus, 285–302. Cham: Springer International Publishing, 2016. http://dx.doi.org/10.1007/978-3-319-23428-1_13.

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Witzany, Jiří. "Interest Rate Models." In Springer Texts in Business and Economics, 261–87. Cham: Springer International Publishing, 2020. http://dx.doi.org/10.1007/978-3-030-51751-9_7.

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Hilber, Norbert, Oleg Reichmann, Christoph Schwab, and Christoph Winter. "Interest Rate Models." In Springer Finance, 85–90. Berlin, Heidelberg: Springer Berlin Heidelberg, 2013. http://dx.doi.org/10.1007/978-3-642-35401-4_7.

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Eberlein, Ernst, and Jan Kallsen. "Interest Rate Models." In Springer Finance, 663–731. Cham: Springer International Publishing, 2019. http://dx.doi.org/10.1007/978-3-030-26106-1_14.

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Gianin, Emanuela Rosazza, and Carlo Sgarra. "Interest Rate Models." In UNITEXT, 201–32. Cham: Springer International Publishing, 2013. http://dx.doi.org/10.1007/978-3-319-01357-2_10.

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Choe, Geon Ho. "Interest Rate Models." In Universitext, 421–41. Cham: Springer International Publishing, 2016. http://dx.doi.org/10.1007/978-3-319-25589-7_23.

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Albrecher, Hansjoerg, Andreas Binder, Volkmar Lautscham, and Philipp Mayer. "Interest Rate Models." In Compact Textbooks in Mathematics, 91–102. Basel: Springer Basel, 2013. http://dx.doi.org/10.1007/978-3-0348-0519-3_9.

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Rosazza Gianin, Emanuela, and Carlo Sgarra. "Interest Rate Models." In UNITEXT, 221–53. Cham: Springer Nature Switzerland, 2023. http://dx.doi.org/10.1007/978-3-031-28378-9_10.

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Deshmukh, Shailaja. "Stochastic Interest Rate." In Multiple Decrement Models in Insurance, 205–15. India: Springer India, 2012. http://dx.doi.org/10.1007/978-81-322-0659-0_6.

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Conference papers on the topic "Interest rate models"

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Wei, Xiang, and Ping Hu. "Actuarial models of life insurance with stochastic interest rate." In International Conference on Photonics and Image in Agriculture Engineering (PIAGENG 2009). SPIE, 2009. http://dx.doi.org/10.1117/12.836655.

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Sabbioni, Luca, Marcello Restelli, and Andrea Prampolini. "Fast direct calibration of interest rate derivatives pricing models." In ICAIF '20: ACM International Conference on AI in Finance. New York, NY, USA: ACM, 2020. http://dx.doi.org/10.1145/3383455.3422534.

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Maciel, Leandro, Fernando Gomide, and Rosangela Ballini. "MIMO evolving functional fuzzy models for interest rate forecasting." In 2012 IEEE Conference on Computational Intelligence for Financial Engineering & Economics (CIFEr). IEEE, 2012. http://dx.doi.org/10.1109/cifer.2012.6327781.

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Luo, Zhen, Yingfang Zhang, Chengxuan Hu, Yuxuan Xia, and Shengxin Zhu. "Click-Through Rate Prediction Models based on Interest Modeling." In BDE 2023: 2023 5th International Conference on Big Data Engineering. New York, NY, USA: ACM, 2023. http://dx.doi.org/10.1145/3640872.3640876.

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Feng, Yufei, Fuyu Lv, Weichen Shen, Menghan Wang, Fei Sun, Yu Zhu, and Keping Yang. "Deep Session Interest Network for Click-Through Rate Prediction." In Twenty-Eighth International Joint Conference on Artificial Intelligence {IJCAI-19}. California: International Joint Conferences on Artificial Intelligence Organization, 2019. http://dx.doi.org/10.24963/ijcai.2019/319.

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Click-Through Rate (CTR) prediction plays an important role in many industrial applications, such as online advertising and recommender systems. How to capture users' dynamic and evolving interests from their behavior sequences remains a continuous research topic in the CTR prediction. However, most existing studies overlook the intrinsic structure of the sequences: the sequences are composed of sessions, where sessions are user behaviors separated by their occurring time. We observe that user behaviors are highly homogeneous in each session, and heterogeneous cross sessions. Based on this observation, we propose a novel CTR model named Deep Session Interest Network (DSIN) that leverages users' multiple historical sessions in their behavior sequences. We first use self-attention mechanism with bias encoding to extract users' interests in each session. Then we apply Bi-LSTM to model how users' interests evolve and interact among sessions. Finally, we employ the local activation unit to adaptively learn the influences of various session interests on the target item. Experiments are conducted on both advertising and production recommender datasets and DSIN outperforms other state-of-the-art models on both datasets.

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Jia, Nian-Nian, Yue Li, and Dong-Hui Wang. "Installment Joint Life Insurance Actuarial Models with the Stochastic Interest Rate." In 2014 International Conference on Management Science and Management Innovation (MSMI 2014). Paris, France: Atlantis Press, 2014. http://dx.doi.org/10.2991/msmi-14.2014.42.

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Jia, N. N., H. Yang, and J. B. Yang. "Actuarial Pricing Models of Reverse Mortgage with the Stochastic Interest Rate." In 2015 International Conference on Economics, Social Science, Arts, Education and Management Engineering. Paris, France: Atlantis Press, 2015. http://dx.doi.org/10.2991/essaeme-15.2015.137.

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Sekmen, Fuat, and Galip Afsin Ravanoglu. "The Effects of the Interest Rate and Foreign Exchange Rates on Kyrgyzstan Export." In International Conference on Eurasian Economies. Eurasian Economists Association, 2017. http://dx.doi.org/10.36880/c09.02012.

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In the Keynesian models, such as Mundell-Fleming model, it is accepted that there is a significant relationship between interest rates and the value of national currency. When interest rate increases, demand for assets in terms of national currency rises and the value of national currency ascends, but in this case because of diminishing exports, the balance of trade deteriorates. In this study, it is stressed that the value of national currency is determined by productivity and output increasing. This study analysis export, interest rate, exchange rate and inflation relationship for Kyrgyzstan economy for the period of 2002:1-2017:4 The VAR granger causality method is used to get the relationship among the variables used in this study. The result of VAR granger causality test shows that there is causality from exchange rate to inflation. Also, it has been found that there has been causality running from inflation to interest rate.

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Yu, Xiaojian, Youyi Wang, and Min Fan. "A Comparison Study on Interest Rate Models of SHIBOR Based on MCMC Method." In 2009 International Conference on E-Business and Information System Security (EBISS). IEEE, 2009. http://dx.doi.org/10.1109/ebiss.2009.5137866.

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Hughston, Lane P., and Francesco Mina. "On the Representation of General Interest Rate Models as Square-Integrable Wiener Functionals." In Recent Advances in Financial Engineering 2011 - The International Workshop on Finance 2011. Singapore: World Scientific Publishing Co. Pte. Ltd., 2012. http://dx.doi.org/10.1142/9789814407335_0001.

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Reports on the topic "Interest rate models"

1

Ait-Sahalia, Yacine. Testing Continuous-Time Models of the Spot Interest Rate. Cambridge, MA: National Bureau of Economic Research, November 1995. http://dx.doi.org/10.3386/w5346.

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Ayres, João, and Radoslaw Paluszynski. Rollover and Interest-Rate Risks in Self-Fulfilling Debt Models. Inter-American Development Bank, December 2023. http://dx.doi.org/10.18235/0005361.

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This paper proposes a model of sovereign default that features interest rate multiplicity driven by rollover risk. Our core mechanism shows that the possibility of a rollover crisis by itself can lead to high interest rates, which in turn reinforces the rollover risk. By exploiting complementarity between the traditional notions of slow- and fast-moving crises, our model generates a rich simulated dynamics that features frequent defaults and a volatile bond spread even in the absence of shocks to fundamentals. In the presence of risky income, our mechanism amplifies the dynamics of debt and spreads relative to model benchmarks where equilibrium multiplicity relies on the underlying shocks to income.

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Hafer, R. W., and Scott E. Hein. Forecasting Inflation Using Interest Rate and Time-Series Models: Some International Evidence. Federal Reserve Bank of St. Louis, 1988. http://dx.doi.org/10.20955/wp.1988.001.

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Salazar-Díaz, Andrea, Aaron Levi Garavito Acosta, Sergio Restrepo-Ángel, and Leidy Viviana Arcila-Agudelo. Real Equilibrium Exchange Rate in Colombia: Thousands of VEC Models Approach. Banco de la República Colombia, December 2022. http://dx.doi.org/10.32468/be.1221.

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Behavioral Equilibrium Exchange Rate (BEER) models suggest many variables as potential drivers of equilibrium real exchange rates (ERER). This gives rise to model uncertainty issues, as ERER depends and varies, often drastically, on a particular set of chosen variables. We address this issue by estimating thousands of Vector Error Correction (VEC) specifications for Colombian data between 2000Q1-2019Q4. According to an extensive literature review, we employ thirty-five proxies categorized among five fixed groups of economic fundamentals that underlie the ERER: Indebtedness, Fiscal sector, Productivity, Terms-of-Trade, and Interest Rate Differentials. Our approach derives an empirical distribution of ERER that allows us to state with greater certainty, among hundreds of plausible economic specifications, whether the real exchange rate is either misaligned or in equilibrium.

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Fernández Martín, Andrés, and Adam Gulan. Interest Rates and Business Cycles in Emerging Economies: The Role of Financial Frictions. Inter-American Development Bank, November 2012. http://dx.doi.org/10.18235/0011424.

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Countercyclical country interest rates have been shown to be both a distinctive characteristic and an important driving force of business cycles in emerging market economies. In order to account for this, most business cycle models of emerging market economies have relied on ad hoc and exogenous countercyclical interest rate processes. This paper embeds a financial contract à la Bernanke et al. (1999) in a standard small open economy business cycle model that endogenously delivers countercyclical interest rates. The model is then applied to the data, drawn from a novel panel dataset for emerging economies that includes financial data, namely sovereign and corporate interest rates as well as leverage. It is shown that the model accounts well not only for countercyclical interest rates, but also for other stylized facts of emerging economies` business cycles, including the dynamics of leverage.

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Paluszynski, Radoslaw. Multiplicity in Sovereign Default Models: Calvo Meets Cole-Kehoe. Inter-American Development Bank, September 2023. http://dx.doi.org/10.18235/0005150.

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This paper proposes a model of sovereign default that features interest rate multiplicity driven by rollover risk. Our core mechanism shows that the possibility of a rollover crisis by itself can lead to high interest rates, which in turn reinforces the rollover risk.By exploiting complementarity between the traditional notions of slow- and fast-moving crises, our model generates a rich simulated dynamics that features frequent defaults and a volatile bond spread even in the absence of shocks to fundamentals. In the presence of risky income, our mechanism amplifies the dynamics of debt and spreads relative to model benchmarks where equilibrium multiplicity relies on the underlying shocks to income.

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Crump, Richard K., Stefano Eusepi, and Emanuel Moench. Is There Hope for the Expectations Hypothesis? Federal Reserve Bank of New York, April 2024. http://dx.doi.org/10.59576/sr.1098.

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Most macroeconomic models impose a tight link between expected future short rates and the term structure of interest rates via the expectations hypothesis (EH). While the EH has been systematically rejected in the data, existing work evaluating the EH generally assumes either full-information rational expectations or stationarity of beliefs, or both. As such, these analyses are ill-equipped to refute the EH when these assumptions fail to hold, fueling hopes for a “resurrection” of the EH. We introduce a model of expectations formation which features time-varying means and accommodates deviations from rationality. This model tightly matches the entire joint term structure of expectations for output growth, inflation, and the short-term interest rate from all surveys of professional forecasters in the U.S. We show that deviations from rationality and drifting long-run beliefs consistent with observed measures of expectations, while sizable, do not come close to bridging the gap between the term structure of expectations and the term structure of interest rates. Not only is the EH decisively rejected in the data, but model-implied short-rate expectations generally display, at best, only a weak co-movement with the forward rates of corresponding maturities.

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Palatiello, Brett, and Philip Pinkington. Government Deficits and Interest Rates: A Keynesian View. Institute for New Economic Thinking Working Paper Series, April 2022. http://dx.doi.org/10.36687/inetwp183.

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We test the neoclassical loanable funds model which postulates that, ceteris paribus, government borrowing increases the long-term rate of interest. The empirical literature exploring such a connection remains largely mixed. We clarify the conflicting results by deploying an ARDL model to decompose the relationship in the United States into long and short-run effects across multiple measures of the government deficit and long-term interest rate. We find a tendency for changes in the deficit to increase long-term interest rates in the short run but the effect is reversed in the long run. We argue that these results are consistent with John Maynard Keynes’ view of the long-term rate as being heavily influenced by monetary policy, central bank credibility and market convention.

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Galindo, Arturo J., and Roberto Steiner. Asymmetric Interest Rate Transmission in an Inflation Targeting Framework: The Case of Colombia. Banco de la República de Colombia, October 2020. http://dx.doi.org/10.32468/be.1138.

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After adopting an inflation targeting framework for monetary policy at the turn of the century, the Central Bank of Colombia started actively using the monetary policy interest rate as its key policy tool. In this regard, this paper examines the interest rate pass-through from the monetary policy rate to the retail rates in Colombia and explores asymmetries in the adjustment process within the framework of a non-linear version of the ARDL (NARDL) model developed by Shin et al. (2014). Our findings show that the policy rate plays a key role in determining deposit and lending retail rates but the nature of the pass-through varies across different types of lending products. In the case of lending rates, the pass-through is usually a full one, and takes around 12 months to be nearly complete. Our results capture an asymmetric positive pass-through in deposit rates and an upward rigidity in the lending rates of consumer and ordinary corporate loans, key segments of the credit market. These findings imply that most retail lending rates respond more to policy rate cuts than to hikes, indicating that financial intermediaries are more reluctant to raise interest rates than to decrease them following policy adjustments.

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Boel, Paola, and Christopher J. Waller. On the essentiality of credit and banking at zero interest rates. Federal Reserve Bank of Cleveland, May 2023. http://dx.doi.org/10.26509/frbc-wp-202313.

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We investigate the welfare-increasing role of credit and banking at zero interest rates in a microfounded general equilibrium monetary model. Agents differ in their opportunity costs of holding money due to heterogeneous idiosyncratic time-preference shocks. Without banks, the constrained-efficient allocation is never attainable, since impatient agents always face a positive implicit rate in equilibrium. With banks, patient agents pin down the borrowing rate and in turn enable impatient agents to borrow at no cost when the inflation rate approaches the highest discount factor. Banks can therefore improve welfare at zero rates, provided that both types of agents are included in the financial system and that the borrowing limit is sufficiently lax. The result is robust to several extensions.

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