Journal articles: 'Low-Interest Rate Policy'

1

Pavasuthipaisit, Robert. "Optimal exchange-rate policy in a low interest rate environment." Journal of the Japanese and International Economies 23, no. 3 (September 2009): 264–82. http://dx.doi.org/10.1016/j.jjie.2009.02.003.

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Rogoff, Kenneth. "Monetary policy in a low interest rate world." Journal of Policy Modeling 39, no. 4 (July 2017): 673–79. http://dx.doi.org/10.1016/j.jpolmod.2017.05.014.

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Kiley, Michael T., and John M. Roberts. "Monetary Policy in a Low Interest Rate World." Brookings Papers on Economic Activity 2017, no. 1 (2017): 317–96. http://dx.doi.org/10.1353/eca.2017.0004.

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4

Reinhart, Vincent. "Monetary Policy in a Low‐Interest‐Rate Environment." NBER International Seminar on Macroeconomics 6, no. 1 (January 2009): 346–53. http://dx.doi.org/10.1086/648714.

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5

Li, Kui-Wai. "IS THERE A “LOW INTEREST RATE TRAP”?" Ekonomika 91, no. 1 (January 1, 2012): 7–23. http://dx.doi.org/10.15388/ekon.2012.0.910.

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This article stylizes the monetary policy features applied during the chairmanship of Mr. Alan Greenspan and condenses statistical discussion into the “low interest rate trap” in the U.S. economy. Data from the U.S. in the decade prior to the 2008 financial crisis are used. A monetarist solution to the “low interest rate trap” is provided. The paper challenges the theoretical discussion on the Keynes’ interest rate – output relationship, and poses the question whether difference in investment returns would present a different picture in output growth.

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Pill, Huw. "Monetary Policy in a Low‐Interest‐Rate Environment: A Checklist." NBER International Seminar on Macroeconomics 6, no. 1 (January 2009): 335–45. http://dx.doi.org/10.1086/648713.

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Weymark, Diana N. "Economic structure, policy objectives, and optimal interest rate policy at low inflation rates." North American Journal of Economics and Finance 15, no. 1 (March 2004): 25–51. http://dx.doi.org/10.1016/j.najef.2003.12.005.

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Latsos, Sophia, and Gunther Schnabl. "Determinants of Japanese Household Saving Behavior in the Low-Interest Rate Environment." Economists’ Voice 18, no. 1 (November 3, 2021): 81–99. http://dx.doi.org/10.1515/ev-2021-0005.

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Abstract This paper scrutinizes the role of prolonged, expansionary monetary policy on the saving behavior of Japanese households, focusing on the dramatic change of the household savings rate since 1998, from high to low saving. The literature generally attributes this change to the country’s shift from high-growth to low-growth and its demographic change. This paper empirically examines changes in the incentives for saving and the ability to save connected to monetary policy. It finds that monetary policy had a significant impact on Japan’s household saving behavior via the interest rate channel but not the labor income channel. There is also evidence that rising government deficits come along with declining household saving and that rising wealth boosts saving.

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9

Williamson, Stephen D. "Low Real Interest Rates, Collateral Misrepresentation, and Monetary Policy." American Economic Journal: Macroeconomics 10, no. 4 (October 1, 2018): 202–33. http://dx.doi.org/10.1257/mac.20150035.

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A model is constructed in which households and banks have incentives to fake the quality of collateral. These incentive problems matter when collateral is scarce in the aggregate—when real interest rates are low. Conventional monetary easing can exacerbate these problems, in that the misrepresentation of collateral becomes more profitable, thus increasing haircuts and interest rate differentials. Central bank purchases of private mortgages may not be feasible, due to the misrepresentation of asset quality. If feasible, central bank asset purchase programs work by circumventing suboptimal fiscal policy, not by mitigating incentive problems in asset markets. (JEL E43, E52, E58, E62, G21)

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10

Xu, Bing, Qiuqin He, and Xiaowen Hu. "Coordination of Monetary and Exchange Rate Policy in China: Market Interest Rate Approach." Journal of Advanced Computational Intelligence and Intelligent Informatics 19, no. 3 (May 20, 2015): 456–64. http://dx.doi.org/10.20965/jaciii.2015.p0456.

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We propose a unique time-varying identification approach to the market interest rate based on Taylor Rule for coordinating the monetary and exchange rate policies. The significant differences exist between real and market interest rates — 2001 and 2009 are high real interest rates, and 2004-2005 and 2010-2012 low real interest rates — that identify monetary and exchange rate policy conflicts in China. These conflicts derive from the indirect effect of monetary factor through interest rate inertia and expected output gap in 2001; the indirect effect of exchange rate factor through interest rates and inflation inertia in 2004-2005; the direct effects of monetary and the exchange rate factors and the indirect effects through interest rate and inflation inertia, and the expected inflation and output gap since 2009. Our empirical results provide decision support for the monetary and exchange rate policy for reforming Chinese market interest rates.

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11

Nesterova, Kristina. "Monetary policy special features in the context of low interest rates." Socium i vlast 2 (2020): 50–64. http://dx.doi.org/10.22394/1996-0522-2020-2-50-64.

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Introduction. The paper considers a wide range of monetary policy rules: integral stabilization, NGDP targeting, price level targeting, raising the inflation target, introducing negative nominal interest rates etc. The author also considers discretionary policy used by central banks when the nominal rate is close to zero, such as dramatic preventive cut of the key interest rate and interventions in the open markets with the aim of cutting long-term interest rates. The relevance of this problem is supported by global long-term macroeconomic and demographic factors, such as the dynamics of oil prices and the aging of the population. The aim of the paper is to identify the most effective monetary policy rules in order to reduce the risk of a nominal interest rate falling to zero. Methods. Analysis of the background and the results of general equilibrium models modeling monetary policy is carried out. Analysis of the role of current global trends (based on statistics) in aggravating the problem of declining interest rates. Scientific novelty of the research. The author systematizes the conclusions of modern macroeconomic theory, which offers a number of monetary rules making it possible to reduce the likelihood of falling into the zero bound of interest rate. Results. The effectiveness of monetary rules such as targeting nominal GDP and price levels in preventing the nominal interest rate from falling to zero is shown, primarily due to more efficient public expectations management which is a weak point of discretionary intervention. Conclusions. Under the current global factors for many developed countries and some oil-exporters, the downward trend in nominal rates persists. Combined with slowdown in economic growth, such threat may have negative consequences for the Russian economy. In this case, it seems reasonable to stick to the inflation target above 2% per year and in the future to consider switching to targeting the price level or nominal GDP.

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12

Liu, Ernest, Atif Mian, and Amir Sufi. "Low Interest Rates, Market Power, and Productivity Growth." Econometrica 90, no. 1 (2022): 193–221. http://dx.doi.org/10.3982/ecta17408.

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This study provides a new theoretical result that a decline in the long‐term interest rate can trigger a stronger investment response by market leaders relative to market followers, thereby leading to more concentrated markets, higher profits, and lower aggregate productivity growth. This strategic effect of lower interest rates on market concentration implies that aggregate productivity growth declines as the interest rate approaches zero. The framework is relevant for antitrust policy in a low interest rate environment, and it provides a unified explanation for rising market concentration and falling productivity growth as interest rates in the economy have fallen to extremely low levels.

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Hoffmann, Andreas, and Axel Löffler. "Low interest rate policy and the use of reserve requirements in emerging markets." Quarterly Review of Economics and Finance 54, no. 3 (August 2014): 307–14. http://dx.doi.org/10.1016/j.qref.2014.04.006.

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14

Dickens, Eduin. "The Federal Reserve's Low Interest Rate Policy of 1970-72: Determinants and Constraints." Review of Radical Political Economics 28, no. 3 (September 1996): 115–25. http://dx.doi.org/10.1177/048661349602800310.

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15

Borio, Claudio, and Leonardo Gambacorta. "Monetary policy and bank lending in a low interest rate environment: Diminishing effectiveness?" Journal of Macroeconomics 54 (December 2017): 217–31. http://dx.doi.org/10.1016/j.jmacro.2017.02.005.

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16

Blanchard, Olivier. "Public Debt and Low Interest Rates." American Economic Review 109, no. 4 (April 1, 2019): 1197–229. http://dx.doi.org/10.1257/aer.109.4.1197.

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This lecture focuses on the costs of public debt when safe interest rates are low. I develop four main arguments. First, I show that the current US situation, in which safe interest rates are expected to remain below growth rates for a long time, is more the historical norm than the exception. If the future is like the past, this implies that debt rollovers, that is the issuance of debt without a later increase in taxes, may well be feasible. Put bluntly, public debt may have no fiscal cost. Second, even in the absence of fiscal costs, public debt reduces capital accumulation, and may therefore have welfare costs. I show that welfare costs may be smaller than typically assumed. The reason is that the safe rate is the risk-adjusted rate of return to capital. If it is lower than the growth rate, it indicates that the risk-adjusted rate of return to capital is in fact low. The average risky rate however also plays a role. I show how both the average risky rate and the average safe rate determine welfare outcomes. Third, I look at the evidence on the average risky rate, i.e., the average marginal product of capital. While the measured rate of earnings has been and is still quite high, the evidence from asset markets suggests that the marginal product of capital may be lower, with the difference reflecting either mismeasurement of capital or rents. This matters for debt: the lower the marginal product, the lower the welfare cost of debt. Fourth, I discuss a number of arguments against high public debt, and in particular the existence of multiple equilibria where investors believe debt to be risky and, by requiring a risk premium, increase the fiscal burden and make debt effectively more risky. This is a very relevant argument, but it does not have straightforward implications for the appropriate level of debt. My purpose in the lecture is not to argue for more public debt, especially in the current political environment. It is to have a richer discussion of the costs of debt and of fiscal policy than is currently the case. (JEL E22, E23, E43, E62, H63)

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17

Pyka, Irena, and Aleksandra Nocoń. "Negative Interest Rate Risk. Atavism or Normalization of Central Banks’ Monetary Policy." Acta Universitatis Lodziensis. Folia Oeconomica 3, no. 342 (August 22, 2019): 89–116. http://dx.doi.org/10.18778/0208-6018.342.05.

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In the face of the global financial crisis, central banks have used unconventional monetary policy instruments. Firstly, they implemented the interest rate policy, lowering base interest rates to a very low (almost zero) level. However, in the following years they did not undertake normalizing activities. The macroeconomic environment required further initiatives. For the first time in history, central banks have adopted Negative Interest Rate Policy (NIRP). The main aim of the study is to explore the risk accompanying the negative interest rate policy, aiming at identifying channels and consequences of its impact on the economy. The study verifies the research hypothesis stating that the risk of negative interest rates, so far unrecognized in Theory of Interest Rate, is a consequence of low effectiveness of monetary policy normalization and may adopt systemic nature, by influencing – through different channels – the financial stability and growth dynamics of the modern world economy.

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18

Ahmad, Moid U., and Hetti Arachchige Gamini Premaratne. "Effect of Low and Negative Interest Rates: Evidence from Indian and Sri Lankan Economies." Business Perspectives and Research 6, no. 2 (April 18, 2018): 90–99. http://dx.doi.org/10.1177/2278533718764503.

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Interest rates are critical to any economy. Usually the central bank of a country supervises and tries to control the interest rates but there is always an element of uncontrollable effects: local or international. A central bank adopts a monetary strategy to affect various macroeconomic parameters such as inflation, exchange rate (ER), economic growth and many others. A country may decide to adopt Ultra-low Interest Rate Policy (ULIRP) or Negative Interest Rate Policy (NIRP) or a policy with moderate/high rate of interest. In today’s global business scenario, economies are connected and influence one another. The US and UK economies have seen a very low and negative interest rates historically, at least in recent past. Indian and Sri Lankan economies are integrated with the US and UK economies and thus are affected by their prevailing interest rates. The effect of low and zero interest rate policy of a country (USA and UK) on interest rates and economy of co-integrated economies (India and Sri Lanka) have been studied in this research. The objective of this study is to understand the implications of ULIRPs and NIRPs in the context of Indian and Sri Lankan economies. Two significant conclusions of the research are that Indian and Sri Lankan economies are affected by the US and UK policies and that they are affected at a lag of eight years.

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19

Belke, Ansgar, and Florian Verheyen. "The Low-Interest-Rate Environment, Global Liquidity Spillovers and Challenges for Monetary Policy Ahead." Comparative Economic Studies 56, no. 2 (April 17, 2014): 313–34. http://dx.doi.org/10.1057/ces.2014.14.

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20

Gerstenberger, Juliane, and Gunther Schnabl. "The Impact of the Bank of Japan’s Low-Interest Rate Policy on the Japanese Banking Sector." Credit and Capital Markets – Kredit und Kapital: Volume 54, Issue 4 54, no. 4 (October 1, 2021): 533–62. http://dx.doi.org/10.3790/ccm.54.4.533.

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This paper presents an analysis of the impact of the Bank of Japan’s low-interest rate policy on the banking sector in the wake of the 1998 Japanese financial crisis. We show how the low-cost liquidity provision as a means to stabilize banks has created a growing gap between deposits and loans in the financial system and how the low-interest rate policy has compressed interest margins as the traditional source of banks’ income. Efficiency scores are compiled to estimate the effect of the Bank of Japan’s monetary policy on banks’ technical efficiency. The estimation results provide evidence that the Japanese monetary policy has contributed to declining efficiency in the banking sector, despite – or possibly because of – the increasing concentration within this sector.

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21

Singh, Gurbachan. "Thinking afresh about central bank’s interest rate policy." Journal of Financial Economic Policy 7, no. 3 (August 3, 2015): 221–32. http://dx.doi.org/10.1108/jfep-08-2014-0051.

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Purpose – The purpose of the paper is to improve policy, and also to simplify theory and policy. Design/methodology/approach – Theory is used in a simple and yet powerful way. Stylized facts are used. This paper reconsiders the prevailing macroeconomic policy regime, and proposes an alternative policy regime. Findings – The low interest rate policy of the central bank in a recession is tantamount to imposition of tax on lenders’ interest income and a subsidy for borrowers implying an implicit tax-subsidy scheme. This scheme may be replaced by a different and explicit tax-subsidy scheme. This may also be supplemented by lower consumption taxes in a recession. From the viewpoint of stabilization of aggregate demand, the prevailing policy regime and the proposed policy regime can be equivalent. However, from the viewpoint of general macroeconomic and asset price stability, the proposed policy regime is superior, though it has (additional) cost of administration. Social implications – Macroeconomic and financial instability has large social cost. This paper can be useful in this context, as it has suggestions for improved macroeconomic policy. It also has policy implications for developing countries and highly indebted countries. Originality/value – This paper’s innovation goes well beyond refinements to prevailing theories and policies. Also, it paves the way for further research.

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22

Cao, Jin, and Gerhard Illing. "“Interest Rate Trap”, or Why Does the Central Bank Keep the Policy Rate Too Low for Too Long?" Scandinavian Journal of Economics 117, no. 4 (June 30, 2015): 1256–80. http://dx.doi.org/10.1111/sjoe.12118.

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23

van Riet, Ad. "Monetary Policy and Unnatural Low Interest Rates: Secular Stagnation or Financial Repression?" Review of Economics 70, no. 2 (September 25, 2019): 99–135. http://dx.doi.org/10.1515/roe-2019-0015.

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Abstract Market interest rates have been on a declining trend over the past 35 years in all advanced economies, even reaching negative territory in some European jurisdictions. This article reviews two competing explanations for the occurrence of unnatural low interest rates. The secular stagnation hypothesis of Keynesian origin maintains that persistent non-monetary factors have caused a structural excess of desired savings over planned investments which steadily pushed down the equilibrium real interest rate that is consistent with a balanced economy. Major central banks in turn failed to sufficiently lower their monetary policy rates to revive aggregate demand, leading to anaemic economic recoveries and hysteresis effects. By contrast, the financial repression doctrine argues that central banks pursued low interest rates to ease the government budget constraint and serve political objectives. The Austrian School of Economics states that this monetary easing bias sowed the seeds of repeated boom/bust cycles and created economic distortions that dragged down potential growth and the equilibrium real interest rate. The core of the debate appears to be the long-standing controversy about the desirable role for the state in guiding the economy on a higher potential growth path as opposed to relying on the efficiency of market processes in generating prosperity.

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Nakashima, Kiyotaka. "AN EXTREMELY-LOW-INTEREST-RATE POLICY AND THE SHAPE OF THE JAPANESE MONEY DEMAND FUNCTION." Macroeconomic Dynamics 13, no. 5 (October 8, 2009): 553–79. http://dx.doi.org/10.1017/s1365100509080225.

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This paper explores the shape of the Japanese money demand function in relation to the historical path of the Bank of Japan's policy rate by employing Saikkonen and Choi's [Econometric Theory 20, 301–340 (2004)] cointegrating smooth transition model. The nonlinear model provides a unified econometric framework, not only for pursuing the time profile of interest elasticity, but also to test the linearity of the Japanese money demand function. The test results for the linearity of the Japanese money demand function provide evidence of nonlinearity with a semilog model and linearity with a double-log model. Using a nonlinear semilog model, the analysis also finds that Japanese money demand comprises three regimes and that the interest semielasticity began to increase in the early 1990s when the Bank of Japan set the policy rate below 3%.

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Guo, Haifeng, Alexandros Kontonikas, and Paulo Maio. "Monetary Policy and Corporate Bond Returns." Review of Asset Pricing Studies 10, no. 3 (July 7, 2020): 441–89. http://dx.doi.org/10.1093/rapstu/raaa005.

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Abstract We investigate the impact of monetary policy shocks on excess corporate bonds returns. We obtain a significant negative response of bond returns to policy shocks, which is especially strong among low-grading bonds. The largest portion of this response is related to higher expected bond returns (risk premium news), while the impact on expectations of future interest rates (interest rate news) plays a secondary role. However, the interest rate channel is dominant among high-grading bonds and Treasury bonds. Looking at the two components of bond premium news, we find that the dominant channel for high-rating (low-rating) bonds is term premium (credit premium) news. (JEL 44, E52, G10, G12) Received: March 25, 2019: Editorial decision: March 27, 2020 by Editor: Hui Chen. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

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Rungcharoenkitkul, Phurichai, and Fabian Winkler. "The Natural Rate of Interest Through a Hall of Mirrors." Finance and Economics Discussion Series 2022, no. 010 (March 18, 2022): 1–48. http://dx.doi.org/10.17016/feds.2022.010.

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Prevailing explanations of persistently low interest rates appeal to a secular decline in the natural interest rate, or r-star, due to factors outside monetary policy's control. We propose informational feedback via learning as an alternative explanation for persistently low rates, where monetary policy plays a crucial role. We extend the canonical New Keynesian model to an incomplete information setting where the central bank and the private sector learn about r-star and infer each other's information from observed macroeconomic outcomes. An informational feedback loop emerges when each side underestimates the effect of its own action on the other's inference, possibly leading to large and persistent changes in perceived r-star disconnected from fundamentals. Monetary policy, through its influence on the private sector's beliefs, endogenously determines r-star as a result. We simulate a calibrated model and show that this `hall-of-mirrors' effect can explain much of the decline in real interest rates since 2008.

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27

Zhang, Xiaoyu, and Fanghui Pan. "The Dependence of China’s Monetary Policy Rules on Interest Rate Regimes: Empirical Analysis Based on a Pseudo Output Gap." Sustainability 11, no. 9 (May 2, 2019): 2557. http://dx.doi.org/10.3390/su11092557.

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Although a large number of scholars have studied the policy preferences and monetary policy rules of China’s central bank, most have found no evidence that China’s central bank has adjusted the nominal interest rates against the output gap. By constructing the pseudo output gap defined by the deviation of the real output growth rate and the target growth rate, this paper finds that China’s central bank prefers to adjust the nominal interest rates against the pseudo output gap. The monetary policy preferences and rules of China’s central bank in different interest rate regimes are investigated based on the threshold Taylor rule model. It is found that, in the high-interest-rate regime, the central bank adjusts the nominal interest against the inflation gap and the pseudo output gap, while in the low-interest-rate regime, there is no evidence that the central bank adjusts the nominal interest rates against the pseudo output gap. The lower bound of interest rate reduction and the weakening of interest rate policy effects caused by the liquidity trap of the interest rate are the possible reasons for China’s central bank not to adjust the nominal interest rates against the pseudo output gap.

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N. Kallianiotis, Dr Ioannis, and J. Kania. "Monetary Policy: Is the Dual Mandate of the Fed Maximizing the Social Welfare?" International Journal of Economics and Financial Research, no. 56 (June 5, 2019): 112–42. http://dx.doi.org/10.32861/ijefr.56.112.142.

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In this work we deal mostly with the recent (2008-present) Federal Reserve operated monetary policies, which are two unprecedented and distinct monetary policy regimes. The Zero Interest Rate Regime (2008:12-2015:11) and the New Regime (2015:12-2018:12). These different monetary policy regimes provided various outcomes for inflation, interest rates, financial markets, personal consumption, personal savings, real economic growth, and social welfare. Some of the important results are that monetary policy appears to be able to affect long-term real interest rates, risk, the prices of the financial assets, and very little the real personal consumption, personal savings, and the real economic growth during the recent period of extreme monetary policy, in which the Fed held short-term interest rates abnormally low for an extended period (2008-2015) and the present time, which keeps the federal funds rate below the inflation rate. The Fed’s interest rate target was set during those seven years at 0% to 0.25%. On December 16, 2015, the Fed started increasing the target rate by 25 basis points approximately in each FOMC meeting, from 0.25% to 0.50% to 0.75%, and presently to 2.50%. We want to explain the low level of long-term interest rates and the real rate of interest (cost of capital) in the economy. The evidence suggests that it is the Fed the main cause of the low (negative) real interest rate following the 2007-2008 financial crisis. This monetary policy was not very effective (the zero interest rate target of the Fed). It has created a new bubble in the financial market, future inflation, and a redistribution of wealth from risk-averse savers to banks and risk-taker speculators. In addition, it has increased the risk (RP) by making the real risk-free rate of interest negative. The effects on growth, prices, and employment were gradual and very small, due to outsourcing and unfair trade policies, which have affected negatively the social welfare. The dual mandate (price stability and maximum employment) of the Fed is not sufficient to maximize the social welfare of the country.

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Nguyen, Chu V. "Credibility of the Philippine Central Bank: Evidenced by the Interest Rate Pass-Through." Review of Economics and Development Studies 3, no. 1 (June 30, 2017): 47–56. http://dx.doi.org/10.26710/reads.v3i1.87.

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This study investigates the Philippine interest rate pass-through over the December 2001 through January 2016 period. The empirical findings suggest that the Philippine Central Bank has not been very effective in formulating and implementing its countercyclical monetary policy. Specifically, the empirical results reveal very low short-run and long- run interest rate pass-through. The Bounds test results indicate no long-term relationship between countercyclical monetary policy and market rates. Notwithstanding the banking system's remarkable performance in the recent years, amid lingering uncertainties in global financial markets, the Philippine Central Bank lacked the credibility in conducting its countercyclical monetary policy. This empirical finding may not be desirable but it forewarns the monetary policy makers of challenges in formulating and implementing their monetary policy.

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Conrad, Christian A. "The Effects on Investment Behavior of Zero Interest Rate Policy—Evidence From a Roulette Experiment." Applied Economics and Finance 6, no. 4 (May 16, 2019): 18. http://dx.doi.org/10.11114/aef.v6i4.4272.

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This paper examines the effects of interest rate cuts on investment behavior. The methodology is to simulate investment decision making under different capital costs. The experiment showed that decreasing interest rates encourage risk-taking. With the decreased interest rate as borrowing costs the risk taking increased weakly but continuously. The risk taking increased strongly when the interest rate reached zero. Thus the experiment showed excessive risk-taking when there were no capital costs. This finding supports the hypothesis that extreme expansive monetary policy with low, zero or negative interest rates encourage financial bubbles and overinvestments or wrong investments in the real economy.

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Smaga, Paweł. "Are interest rate changes comoving with financial cycle?" Acta Oeconomica 71, no. 2 (June 23, 2021): 259–77. http://dx.doi.org/10.1556/032.2021.00013.

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AbstractWe explore to what extent official interest rate changes can potentially in a procyclical manner impact different financial cycle indicators (credit/GDP, debt service ratio, house prices and stock market indices). We test this on data covering 1995−2016 in 21 countries and the euro area using the Concordance index and Monetary policy procyclicality ratio. Results show that this was not a widespread phenomenon, but there was significant heterogenenity across countries. The procyclicality of interest rate changes was usually higher when financial cycle gaps were increasing and lower when they were decreasing. On average, central banks in several larger economies were running potentially less procyclical monetary policy than those in the smaller ones. The resulting propensity of conflicts between achieving price and financial stability by central banks was low, as only in 10% of the cases the objectives were conflicting (usually when inflation was below the target and the credit cycle was in an expansion phase).

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Aizenman, Joshua, Yin-Wong Cheung, and Hiro Ito. "The Interest Rate Effect on Private Saving: Alternative Perspectives." Journal of International Commerce, Economics and Policy 10, no. 01 (February 2019): 1950002. http://dx.doi.org/10.1142/s1793993319500029.

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Lowering the policy interest rate could stimulate consumption and investment while discouraging people from saving. However, such a move may also prompt people to save more to compensate for the low rate of return. Using the data of 135 countries from 1995 to 2014, we show that a low interest rate environment can yield different effects on private saving under different economic environments. The real interest rate affects private saving negatively if output volatility, old-age dependency, or financial development is above a certain threshold. Depending on a country’s specific economic circumstances, these effects are significant for the economy — a four-percentage point decline in the real interest rate, which is approximately the same as one standard deviation for China, would lead to a 1.52 percentage point increase in the Chinese private saving rate. Further, when the real interest rate is below 1.1%, greater output volatility would lead to higher private saving in developing countries.

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33

Toma, Mark. "Interest Rate Controls: The United States in the 1940s." Journal of Economic History 52, no. 3 (September 1992): 631–50. http://dx.doi.org/10.1017/s0022050700011426.

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In 1942 the U.S. Treasury and the Federal Reserve agreed to keep the interest rate on long-term government bonds below a ceiling of 2.5 percent. Assuming rational expectations, the ceiling on long-term interest rates can be viewed as a government commitment to low long-run inflation. The Fed also agreed to buy and sell short-term government bonds at a below-market rate of 3/8 percent. This policy did not result in long-run inflation because it was narrowly confined to 3-month Treasury bills.

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Kudoh, Noritaka. "POLICY INTERACTION AND LEARNING EQUILIBRIA." Macroeconomic Dynamics 17, no. 4 (November 11, 2011): 920–35. http://dx.doi.org/10.1017/s1365100511000526.

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This note studies fiscal–monetary policy interactions in an endogenous growth model with multiple assets. The “growth-rate Laffer curve” clarifies an important tension between economic growth and government revenue and reveals that higher economic growth does not always finance a larger budget deficit. There are two Pareto-ranked balanced-growth equilibria, which can both be E-stable. Although fiscal policy can eliminate the expectational indeterminacy, it rules out the equilibrium with a higher growth rate and higher welfare. Near the lower bound of the nominal interest rate, an arbitrarily small budget deficit will select the low-growth equilibrium to be the unique E-stable equilibrium.

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Spahija, Fidane. "THE VARIANCE AND TREND OF INTEREST RATE – CASE OF COMMERCIAL BANKS IN KOSOVO." CBU International Conference Proceedings 3 (September 19, 2015): 007–13. http://dx.doi.org/10.12955/cbup.v3.577.

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Today’s debate on the interest rate is characterized by three key issues: the interest rate as a phenomenon, the interest rate as a product of factors (dependent variable), and the interest rate as a policy instrument (independent variable). In this article, the variance in interest rates, as the dependent variable, comes in two statistical sizes: the variance and trend. The interest rates include the price of loans and deposits. The analysis of interest rates on deposits and loan is conducted for non-financial corporation and family economy. This study looks into a statistical analysis, to highlight the variance and trends of interest rates for the period 2004-2013, for deposits and loans in commercial banks in Kosovo. The interest rate is observed at various levels. Is it high, medium or low? Does it explain growth trends, keep constant, or reduce? The trend is observed whether commercial banks maintain, reduce, or increase the interest rate in response to the policy that follows the Central Bank of Kosovo. The data obtained will help to determine the impact of interest rate in the service sector, investment, consumption, and unemployment.

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CURCIO, DOMENICO, NICOLA BORRI, ROSARIA CERRONE, and ROSA COCOZZA. "FINANCIAL INTERMEDIARIES’ ASSET–LIABILITY DEPENDENCY AND LOW-INTEREST-RATE ENVIRONMENT: EVIDENCE FROM EU LIFE INSURERS." Journal of Financial Management, Markets and Institutions 07, no. 01 (June 2019): 1940003. http://dx.doi.org/10.1142/s2282717x19400036.

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This research studies the relationships between the two sides of life insurers’ balance sheet and investigates whether and how they changed during recent past years, when European Central Bank monetary policy drove market rates to unprecedented low levels. By using a canonical correlation analysis, we study the internal structure of the links within and between the asset and liability sides of 24 major European Union (EU) life insurers’ balance sheets over the 2007–2015 time horizon. We find strong and substantial evidence that life insurers’ assets and liabilities have become more independent over time. We argue that the declining trend of market interest rates has contributed to the generalized reduction in the linkage between the asset side and the liability side of EU life insurers, and has made insurance companies more exposed to ALM-related risks relative to the period before the financial crisis.

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Haghbayan, Mahdi, and Fereshteh Nasrollahi heravi. "Decreasing Classification Risk in Term Life Insurance Considering the Interest rate and Period of Contract." Journal of Management and Accounting Studies 9, no. 01 (February 24, 2021): 23–31. http://dx.doi.org/10.24200/jmas.vol9iss01pp23-31.

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Term life insurance is a type of life insurance policy that provides coverage for a certain period of time. If the insured dies during the time period specified in the policy and the policy is active, a death benefit will be paid. One of the basic problem in insurance company is that insurers cannot classify high level risk individual from low level risk individual and cannot offer different premium to each individual. Therefore, the aim of this study was to show how insurers can decrease risk classification and increase demand of low level individual for insurance. We used Mahdavi’s model and it was expanded with contract duration, interest rate and individual’s age parameters. We found that if contract duration or interest rate increases, demand for insurance and risk classification also increase. However, if age of the individual or cost of claim increases, demand for insurance decreases. In additional, when cost of claim goes up, risk classification declines

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Fedorova, Elena, and Elena Meshkova. "Monetary policy and market interest rates: literature review using text analysis." International Journal of Development Issues 20, no. 3 (August 17, 2021): 358–73. http://dx.doi.org/10.1108/ijdi-02-2021-0049.

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Purpose This paper aims to examine the relationship between monetary policy and market interest rates. This paper examines the efficiency of interest rate channel used in monetary regulation as well as implementation of monetary policy under low interest rates. This paper examines and reviews the scientific literature published over the past 30 years to determine primary research areas, to summarize their results and to identify appropriate measures of monetary policy to be used in practice in changing economic environment. Design/methodology/approach This paper reviews 94 studies focused on the relationship between monetary policy and market interest rates in terms of meeting the goals of macroeconomic regulation. The articles are selected on the basis of Scopus citation and bibliometric analysis. A major feature of this paper is the use of text analysis (data preparation, frequency of terms and collocations use, examination of relationships between terms, use of principal component analysis to determine research thematic areas). Using the method of principal component analysis while studying abstracts this paper reveals thematic areas of the research. Thus, the conducted text analysis provides unbiased results. Findings First, this paper examines the whole complex of relationships between monetary policy of central banks and market interest rates. Second, this research reviews a wide range of literature including recent studies focused on specific features of monetary policy under low and negative rates. Third, this study identifies and summarizes the thematic areas of all the researches using text analysis (transmission mechanism of monetary policy, efficiency of zero interest rate policy, monetary policy and term structure of interest rates, monetary policy and interest rate risk of banks, monetary policy of central banks and financial stability). Finally, this paper presents the most important findings of the studied articles related to the current situation and trends on the financial market as well as further research opportunities. This paper finds the principal results of studies on significant issues of monetary policy in terms of its efficiency under low interest rates, influence of its instruments on term structure of interest rates and role of banking sector in implementation of transmission mechanism of monetary policy. Research limitations/implications The limitation of the review is examining articles for the study period of 30 years. Practical implications Central banks of emerging economies should apply the instruments and results of the countries' monetary policies reviewed in this paper. Using text analysis this paper reveals the main thematic areas and summarizes findings of the articles under study. The analysis allows presenting the main ideas related to current economic situation. Social implications The findings are of great value for adjusting the monetary policy of central banks. Also, these are important for people because these show the significant role of monetary policy for the economic growth. Originality/value Using text analysis this paper reveals the main thematic areas (transmission mechanism of monetary policy, efficiency of zero interest rate policy, monetary policy and term structure of interest rates, monetary policy and interest rate risk of banks, monetary policy of central banks and financial stability) and summarizes findings of the articles under study. The analysis allows defining the current ideas relevant to the monetary policy of developing countries. It is important for central banks because it examines the monetary policy problems and proposes optimal solutions.

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Shahin, Rana, Manal Khalil, and Helmy Sallam. "Interest Rate and Bank Risk-Taking: The Role of Income Diversity." International Journal of Accounting and Financial Reporting 12, no. 1 (March 22, 2022): 37. http://dx.doi.org/10.5296/ijafr.v12i1.19560.

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This research examines the impact of interest rates on the risk-taking appetite of banks in Egypt and how income diversity influences their risk-taking. Furthermore, it contributes to the literature by investigating the association between the interacting effect of interest rate and income diversity shares on bank risk-taking. The sample includes 22 banks operating in Egypt spanning from 2011 to 2020. For the analysis, the cross-sectional time-series generalized least squares regression (GLS) approach is employed. The results reveal that low-interest rates exacerbate bank risk-taking. In addition, larger income diversity restricts the risk-taking behavior of banks. Importantly, the results show that banks with higher levels of income diversity push for less risky positions during the low-interest rate period. Hence, the results provide valuable insights into the importance of the moderating role of income diversity strategies. The results are robust to different proxies of bank risk-taking. The policy implications from this research indicate that bank managers and regulators in Egypt as well as in similar emerging economies shall promote income diversity strategies to ensure the safety and soundness of the banking system at times of low-interest rates.

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Belke, Ansgar, and Matthias Göcke. "Interest Rates and Macroeconomic Investment under Uncertainty." Credit and Capital Markets – Kredit und Kapital: Volume 54, Issue 3 54, no. 3 (July 1, 2021): 319–45. http://dx.doi.org/10.3790/ccm.54.3.319.

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The interest rate is generally considered as an important driver of macroeconomic investment characterised by a particular form of path dependency, “hysteresis”. At the same time, the interest rate channel is a central ingredient of monetary policy transmission. In this context, we shed light on the issue (which currently is a matter of concern for many central banks) whether uncertainty over future interest rates at the zero lower bound hampers monetary policy transmission. As an innovation we derive the exact shape of the “hysteretic” impact of rate changes on macroeconomic investment under different sorts of uncertainty. Starting with hysteresis effects on the micro level, we apply an adequate aggregation procedure to derive the interest rate effects on a macro level. Our results may serve as a guideline for future central banks’ policies on how to stimulate investment in times of low or even zero interest rates and uncertainty.

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Sakanko, Musa Abdullahi, and Kanang Amos Akims. "Monetary Policy and Nigeria's Trade Balance, 1980-2018." Signifikan: Jurnal Ilmu Ekonomi 10, no. 1 (March 14, 2021): 129–38. http://dx.doi.org/10.15408/sjie.v10i1.18132.

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Several countries have integrated monetary easement into their foreign policy to faucet the gains from trade thereby, assuring that market forces determine monetary policy instruments such as interest rate and exchange rate. It is on this note and this paper empirically evaluate the effect of monetary policy on Nigeria's trade balance using the Autoregressive Distributed Lag Model on the time series data spanning from 1980 to 2018. The findings reveal that monetary policy tools of real interest and effective exchange rate have a long-run co-integration relationship and significant adverse effects on Nigeria's trade balance both in the short-run and long-run. Thus, the paper concludes that monetary policy is a veritable tool through which Nigeria can maintain a favorable trade balance. Therefore, policymakers should step on measures that will maintain low-interest rates to sustain a flexible exchange rate and remove all rigidities associated with the international payment system.JEL Classification: C22, E52, F13How to Cite:Sakanko, M. A., & Akims, K. A. (2021). Monetary Policy and Nigeria’s Trade Balance, 1980-2018. Signifikan: Jurnal Ilmu Ekonomi, 10(1), 129-138. https://doi.org/10.15408/sjie.v10i1.18132.

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A. Conrad, Christian. "The Effects of Money Supply and Interest Rates on Stock Prices, Evidence from Two Behavioral Experiments." Applied Economics and Finance 8, no. 2 (February 23, 2021): 33. http://dx.doi.org/10.11114/aef.v8i2.5173.

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What is the impact of interest rate and monetary policy on the stock market? Some studies find a positive impact of expansive monetary policy on stock prices others prove the opposite. This paper examines the effects of monetary expansion and interest rate changes on investment behavior on the stock market by illustrating two behavioral experiments with students. In our experiments the increase of money supply and the decrease of interest rates had a direct positive impact on share prices. These findings support the hypothesis that extreme expansive monetary policy with low, zero or negative interest rates encourage financial bubbles on the stock market. To avoid a crash the exit from such a policy must be slow. As happened in 1929, crashes can damage the financial system and the real economy. Central banks must take this into account in their monetary policy.

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Mertens, Thomas M., and John C. Williams. "Monetary Policy Frameworks and the Effective Lower Bound on Interest Rates." AEA Papers and Proceedings 109 (May 1, 2019): 427–32. http://dx.doi.org/10.1257/pandp.20191083.

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This paper applies a New Keynesian model to analyze monetary policy in the presence of a low natural rate of interest and a lower bound on interest rates. Under standard inflation-targeting, inflation expectations will be anchored at a level below the inflation target. Two themes emerge from our analysis: first, the central bank can mitigate this problem of a downward bias in inflation expectations by following an average-inflation targeting framework. Second, price-level targeting that raises inflation expectations when inflation is low can both anchor expectations at target and further reduce the effects of the lower bound on the economy.

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Ezeibekwe, Obinna Franklin. "Monetary Policy and Domestic Investment in Nigeria: The Role of the Inflation Rate." Economics and Business 34, no. 1 (February 1, 2020): 139–55. http://dx.doi.org/10.2478/eb-2020-0010.

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AbstractEconomic theory suggests that monetary policy can be used to stabilize an economy. However, the ability of monetary policy targets—interest rates and money supply—to stabilize an economy depends on their ability to achieve price stability. Using data from 1981 to 2018 and applying the vector error correction model, this paper seeks to determine how the changes in the inflation rate affect the ability of monetary policy tools to stabilize the Nigerian economy and stimulate investment. Empirical results suggest that the impact of the interest rates on investment depends on the level of the inflation rate. The size of the effect of interest rates on investment gets weaker as the inflation rate increases suggesting that monetary policy tools, such as the monetary policy rate (MPR), that directly change the interest rates are robust stabilization tools during periods of declining inflation rates but not relevant during periods of rising inflation rates. This is attributable to low bank lending rates. Additionally, the impact of the money supply target on investment does not depend on the level of the inflation rate. This suggests that monetary policy tools, such as open market operations, that directly change the money supply can be relevant stabilization tools during economic booms and recessions. As a result, the Central Bank of Nigeria should work to deepen the scale, capacity, and efficiency of its open market operations by ensuring that most of the people can participate with minimal transaction cost and by making different financial instruments available.

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Hornstein, Andreas, and Harald Uhlig. "What is the Real Story for Interest Rate Volatility?" German Economic Review 1, no. 1 (February 1, 2000): 43–67. http://dx.doi.org/10.1111/1468-0475.00004.

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Abstract What is the source of interest rate volatility? Why do low interest rates precede business cycle booms? Most observers tend to assume that monetary policy is largely responsible for it. Indeed, a standard real business cycle model delivers rather small fluctuations in real interest rates. Here, however, we present two models of the real business cycle variety, in which the fluctuations of real rates are of similar magnitude as in the data, while simultaneously matching salient business cycle facts. The second model also replicates the cyclical behavior of real interest rates.The models build on recent work by Danthine and Donaldson, Jermann, and Boldrin, Christiano and Fisher. We assume that there are workers and capital owners. The first model posits habit formation and adjustment costs to the stock of capital. The second model assumes that it takes time to plan investment and time to build capital.

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Wang, Mei-Chih, Pao-Lan Kuo, Chan-Sheng Chen, Chien-Liang Chiu, and Tsangyao Chang. "Yield Spread and Economic Policy Uncertainty: Evidence from Japan." Sustainability 12, no. 10 (May 25, 2020): 4302. http://dx.doi.org/10.3390/su12104302.

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In this paper, we adopt the nonlinear autoregressive distributed lags (NARDL) model extended by Shin et al. (2014) to investigate the relationship between the treasury yield spread and economic policy uncertainty (EPU) in Japan. This model helps us to explore the short- and long-run asymmetric reactions of explained variables through positive and negative partial sum decompositions of changes in the explanatory variable(s). In our research, the testing of the NARDL specification reveals the existence of a significant long-run asymmetric equilibrium between the yield spread and EPU in Japan. On the other hand, we find a significant positive nexus between the treasury yield spread and EPU reduction in the long run. We speculate that because of low inflation, a poor economic outlook and the low interest rate environment since 1990, financial agents are markedly sensitive to negative shocks resulting from EPU. This means that when facing a good economy, bond agents are quick to sell, especially with higher-risk long-term interest rate bonds. Meanwhile, because the Bank of Japan announced the Stock Purchasing Plan in October 2002 and from the point view of portfolio management, while the influence of a positive economic outlook dominates the negative outlook, flight from quality has no role in asset portfolio adjustment. The empirical implications are that the long history of unconventional monetary policy supports the demand for both bonds and stock markets. When taking the stock market into consideration, the correlations between the yield spread, EPU and stock market capture the full wealth effects of the low interest rate environment in Japan.

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Kuznetsova, Olga S., Sergey A. Merzlyakov, and Sergey E. Pekarski. "Shaping public confidence as a way to overcome a liquidity trap." Voprosy Ekonomiki, no. 6 (June 6, 2019): 56–78. http://dx.doi.org/10.32609/0042-8736-2019-6-56-78.

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In the aftermath of 2007—2009 global financial crisis, many economies had stuck in a liquidity trap. This stance forced central banks to implement various unconventional monetary policies, including massive purchases of financial assets, cutting policy rates down into the negative zone and reliance on forward guidance. In this paper we critically discuss these policy measures. Unconventional policy success in overcoming a liquidity trap heavily depends on the ability to manage private agents’ expectations. If the central bank is capable to form expectations of low interest rates for a prolonged period after the escape from a liquidity trap, unconventional monetary policies lead to a recovery. Another crucial issue is dynamic inconsistency of prolonged low interest rate policy. We discuss several ways of how the central bank can commit not to lift policy rate up to keep inflation unnecessary low. The problem of dynamic inconsistency, which complicates the formation of such expectations, is also considered, and possible ways of solving this problem are discussed.

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Wang, Xiaoting, Peilong Shen, and Iveta Palečková. "RESEARCH ON THE MACRO NET FINANCIAL ASSETS VALUE EFFECT OF MONETARY POLICY." E+M Ekonomie a Management 25, no. 1 (March 2022): 161–76. http://dx.doi.org/10.15240/tul/001/2022-1-010.

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This paper focuses on the impact of Chinese and US monetary policy on the net financial assets value of macro balance sheet from both theoretical and empirical aspects and reveals the sectoral solvency risk conduction path based on the balance sheet channel. In addition, the paper is focused on the effects of the interest rate as a target tool for monetary policy on the macro net financial assets. In the theoretical analysis, the net present value model of the economy is constructed, and a general equilibrium model representing the relationship between the real interest rate and net asset value of five sectors is derived (government, financial, resident, enterprise and central bank sector). This model explains the basic principle how interest rates affect net financial assets values. The dataset includes the central bank, commercial banks and shadow banks, and the stock and equity liabilities of the debtor are taken as the net asset of financial institutions during the period 2000–2016. The empirical results show that an increase in the real deposit interest rate improves the net financial assets value of the four sectors, and an increase in the real loan interest rate reduces the net financial assets value of the four sectors, while the effect of the real loan interest rate is greater than the real deposit interest rate. The effect ranking of interest rates on the four sectors is financial, enterprise, government, and resident sector. Overall, loose monetary policies can reduce macro-financial risks through the balance sheet channel, while the negative effects of long-term low-interest policies should be prevented; the macro-policies should hedge sectoral risks triggered by the exit of the easing policy via the macro balance sheet channel.

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Hattori, Masazumi, Andreas Schrimpf, and Vladyslav Sushko. "The Response of Tail Risk Perceptions to Unconventional Monetary Policy." American Economic Journal: Macroeconomics 8, no. 2 (April 1, 2016): 111–36. http://dx.doi.org/10.1257/mac.20140016.

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We examine the impact of unconventional monetary policy (UMP) on stock market tail risk and risks of extreme interest rate movements. We find that UMP announcements substantially reduced option-implied equity market tail risks and interest rate risks. Most of the impact derives from forward guidance rather than asset purchase announcements. Communication about the future path of policy rates reduced volatility expectations of long-term rates and the associated risk premia. The reaction of equity market tail risk, in turn, points to the risk-taking channel of monetary policy, as the commitment to low funding rates may have relaxed financial intermediaries’ risk-bearing constraints. (JEL E52, E58, G12, G13, G14)

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McKay, Alisdair, and Johannes F. Wieland. "Lumpy Durable Consumption Demand and the Limited Ammunition of Monetary Policy." Econometrica 89, no. 6 (2021): 2717–49. http://dx.doi.org/10.3982/ecta18821.

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The prevailing neo‐Wicksellian view holds that the central bank's objective is to track the natural rate of interest ( r *), which itself is largely exogenous to monetary policy. We challenge this view using a fixed‐cost model of durable consumption demand, in which expansionary monetary policy prompts households to accelerate purchases of durable goods. This yields an intertemporal trade‐off in aggregate demand as encouraging households to increase durable holdings today leaves fewer households acquiring durables going forward. Interest rates must be kept low to support demand going forward, so accommodative monetary policy today reduces r * in the future. We show that this mechanism is quantitatively important in explaining the persistently low level of real interest rates and r * after the Great Recession.

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Journal articles on the topic 'Low-Interest Rate Policy'

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