On the timing of balance of payments crises: Disaggregated information and interest rate policy

This paper proposes a dynamic framework to study the timing of balance of paymentscrises. The model incorporates two main ingredients: (i) investors have private information; (ii)investors interact in a dynamic setting, weighing the high returns on domestic assets against the incentives to pull out before the devaluation. The model shows that the presence of disaggregated information delays the onset of BOP crises, giving rise to discrete devaluations. It also shows that high interest rates can be eective in delaying and possibly avoiding the abandonment of the peg. The optimal policy is to raise interest rates sharply as fundamentals become very weak. However, this policy is time inconsistent, suggesting a role for commitment devices such as currency boards or IMF pressure.

Aggregate vs disaggregate data analysis: a paradox in the estimation of money demand function of Japan under the low interest rate policy

We investigate the issue of whether there was a stable money demand function for Japan in 1990's using both aggregate and disaggregate time series data. The aggregate data appears to support the contention that there was no stable money demand function. The disaggregate data shows that there was a stable money demand function. Neither was there any indication of the presence of liquidity trapo Possible sources of discrepancy are explored and the diametrically opposite results between the aggregate and disaggregate analysis are attributed to the neglected heterogeneity among micro units. We also conduct simulation analysis to show that when heterogeneity among micro units is present. The prediction of aggregate outcomes, using aggregate data is less accurate than the prediction based on micro equations. Moreover. policy evaluation based on aggregate data can be grossly misleading.

Exchange Rate Stabilization and IMF High Interest Rate Policy: A Critical Reconsideration Using a Dynamic Model

This paper examines whether the IMF high interest rate policy was suitable for crisis-ridden East Asian economies. Using an "overshoot" model similar to that of Dornbusch's (1976), it shows that this sort of policy might cause an unnecessary deflationary adjusting process and have no effect on containing the real depreciation of exchange rates in the long run. The study also demonstrates that Thai economic data coincides quite well with the model presented here. Finally, it points out that the high interest policy itself might provoke high risk-premium, the existence of which, in turn, justifies the policy. This means that the policy has a self-fulfilling property. In conclusion, a "one-size-fits-all" adaptation of high interest rate policy in a currency crisis is very dangerous in general, and was inappropriate for East Asia. The desirable policy would have been to let currencies depreciate and keep interest rates stable.

Deflation and monetary policy: A look into Japan and the Euro Area

With more than two decades of weak economic performance since the bubble burst in the ‘90s, the Japanese deflationary scenario has become the economic fate every developed economy fears to become. As the euro area continues to experience sustained low inflation, studying the Japanese monetary policy may shed light on how to prevent persistent deflation. Using an SVAR methodology to understand the monetary transmission mechanism, we find some evidence that the euro area may possess characteristics that would eventually lead to a deflationary scenario. The extent of whether it would suffer the same Japanese fate would depend on how macroeconomic policies are timely coordinated as a response to its liquidity problem and increasing public debt across member states.

Bahamas and Barbados: empirical evidence of interest rate pass-through

Includes bibliography

The problem of estimating the volatility of zero coupon bond interest rate

Financial literature and financial industry use often zero coupon yield curves as input for testing hypotheses, pricing assets or managing risk. They assume this provided data as accurate. We analyse implications of the methodology and of the sample selection criteria used to estimate the zero coupon bond yield term structure on the resulting volatility of spot rates with different maturities. We obtain the volatility term structure using historical volatilities and Egarch volatilities. As input for these volatilities we consider our own spot rates estimation from GovPX bond data and three popular interest rates data sets: from the Federal Reserve Board, from the US Department of the Treasury (H15), and from Bloomberg. We find strong evidence that the resulting zero coupon bond yield volatility estimates as well as the correlation coefficients among spot and forward rates depend significantly on the data set. We observe relevant differences in economic terms when volatilities are used to price derivatives.

The causes and consequences of recent interest rate movements : hearings before the Subcommittee on Domestic Monetary Policy of the Committee on Banking, Finance, and Urban Affairs, House of Representatives, Ninety-eighth Congress, second session, June 8 and July 24, 1984.

Mode of access: Internet.

An evaluation of the transmission of the policy interest rate to the financial system’s interest rates in Colombia

This paper studies monetary policy transmission using several statistical tools -- We find that the relationships between the policy interest rate and the financial system’s interest rates are positive and statistically significant, and transmission is complete eight months after policy shocks occur -- The speed of transmission varies according to the type of interest rates -- Transmission is faster for interest rates on loans provided to households, and is particularly rapid and complete for rates on preferential commercial loans -- Transmission is slower for credit card and mortgage rates, due to regulatory issues (interest rate ceilings)

Interest rate determination in the interbank market

The purpose of this paper is to study the determinants of equilibrium in the market for daily funds. We use the EONIA panel database which includes daily information on the lending rates applied by contributing commercial banks. The data clearly shows an increase in both the time series volatility and the cross section dispersion of rates towards the end of the reserve maintenance period. These increases are highly correlated. With respect to quantities, we find that the volume of trade as well as the use of the standing facilities are also larger at the end of the maintenance period. Our theoretical model shows how the operational framework of monetary policy causes a reduction in the elasticity of the supply of funds by banks throughout the reserve maintenance period. This reduction in the elasticity together with market segmentation and heterogeneity are able to generate distributions for the interest rates and quantities traded with the same properties as in the data.

Interest Rate Co-movements, Global Factors and the Long End of the Term Spread

The disconnect between rising short and low long interest rates has been a distinctive feature of the 2000s. Both research and policy circles have argued that international forces, such as global monetary policy (e.g. Rogoff, 2006); international business cycles (e.g. Borio and Filardo, 2007); or a global savings glut (e.g Bernanke, 2005) may be responsible. In this paper, we employ recent advances in panel data econometrics to document the disconnect and link it explicitly to the existence of a global latent factor that dominates the long end of the term spread for the recent period; the saving glut story emerges as the most likely contender for the global factor.

Export Promotion through Exchange Rate Policy: Exchange Rate Depreciation or Stabilization?

Exchange rate movements affect exports in two ways -- its depreciation and its variability (risk). A depreciation raises exports, but the associated exchange rate risk could offset that positive effect. The present paper investigates the net effect for eight Asian countries using a dynamic conditional correlation bivariate GARCH-M model that simultaneously estimates time varying correlation and exchange rate risk. Depreciation encourages exports, as expected, for most countries, but its contribution to export growth is weak. Exchange rate risk contributes to export growth in Malaysia and the Philippines, leading to positive net effects. Exchange rate risk generates a negative effect for six of the countries, resulting in a negative net effect in Indonesia, Japan, Singapore, Taiwan and a zero net effect in Korea and Thailand. Since the negative effect of exchange rate risk may offset, or even dominate, positive contributions from depreciation, policy makers need to reduce exchange rate fluctuation along with and possibly before efforts to depreciate the currency.

Larry Summers’ interest rate conundrum. CEPS Hi-level Brief, 16 January 2014

Larry Summers has attracted much attention recently for invoking old theories of secular stagnation to explain the persistence of low interest rates in the recent past. The German economist Carl Christian von Weizsäcker has pointed to a retirement savings glut as the cause for low rates. In the view of Thomas Mayer, however, as expressed in this High-Level Brief, these theses lack both theoretical and empirical support and he offers as an alternative explanation the fall-out from the recent credit boom-bust cycle.

Did quantitative easing affect interest rates outside the US? New evidence based on interest rate differentials. CEPS Working Document No. 416/January 2016

This paper explores the effects of non-standard monetary policies on international yield relationships. Based on a descriptive analysis of international long-term yields, we find evidence that long-term rates followed a global downward trend prior to as well as during the financial crisis. Comparing interest rate developments in the US and the eurozone, it is difficult to detect a distinct impact of the first round of the Fed’s quantitative easing programme (QE1) on US interest rates for which the global environment – the global downward trend in interest rates – does not account. Motivated by these findings, we analyse the impact of the Fed’s QE1 programme on the stability of the US-euro long-term interest rate relationship by using a CVAR (cointegrated vector autoregressive) model and, in particular, recursive estimation methods. Using data gathered between 2002 and 2014, we find limited evidence that QE1 caused the break-up or destabilised the transatlantic interest rate relationship. Taking global interest rate developments into account, we thus find no significant evidence that QE had any independent, distinct impact on US interest rates.

Revisiting the interest rate puzzle

This article makes a connection between Lucas` (1978) asset pricing model and the macroeconomic dynamics for some selected countries. Both the relative risk aversion and the impatience for postponing consumption by synthesizing the investor behaviour can help to understand some key macroeconomic issues across countries, such as the savings decision and the real interest rate. I find that the government consumption makes worse the so-called `equity premium-interest rate puzzle`. The first root of the quadratic function for explaining the real interest rate can produce this puzzle, but not the second root. Thus, Mehra and Prescott (1985) identified only one possible solution.