Central Bank Rate Research Articles

Legal independent central bank and exchange rate

Legal independent central bank and exchange rate

La relazione tra saggio di profitto e tasso d’interesse e il ruolo della profittabilità bancaria : The relation between the profit rate and the interest rate, and the role of bank profitability

The paper focuses on theoretical aspects of the relationship between the profit rate and the interest rate. Two roughly opposite approaches emerge in the literature: in a first one, the interest rate determines the profit rate, and therefore income distribution; in a second one, the profit rate regulates the interest rate, once distribution is already determined. The introduction of the condition that bank capital receives a profit rate at least equal to the general one makes it possible to conceptualize the interest rate as the endogenously determined price of the commodity ‘loan’, and the central bank rate as the price of a ‘bank input’. JEL codes: E11, E43, G21 Keywords: Interest rate, Rate of profit, Bank profitability, Marx, Monetary policy

Causal Effect of Financial Market Frictions and Flight to Quality on Cost of Credit in Kenya

Financial market conditions have been declining over the past ten years globally as most developing countries continue to adopt more liberal financial policies, such conditions may amplify adverse shocks to the economy. The Kenyan Banking sector was highly profitable before the implementation of financial market frictions, with industry return on equity’s average of 20%. The ratio of credit supply to gross domestic product was 35%; and the economy grew by 5.6 %. Nonetheless, after its adoption, listed Banks recorded negative Earnings per Share growth of 8.2%, compared to an average positive growth of 14.1%, The Net Interest Margin declined to 8.4% from 9.4%. Studies relating to financial market frictions, flight to quality and Cost of Credit have produced mixed results. It was on this basis that this study sought to establish the effect of financial market frictions and flight to quality on cost of credit in Kenya. The study adopted correlational research design. Secondary data from the Kenyan Market for the period January 2009 to December 2019 was analyzed. Augmented Dickey Fuller and Philips-perron unit-root test was used to test the stationarity of the data. VECM was estimated to establish the speed of adjustment towards the long run equilibrium; Wald statistics was also estimated to establish short run causalities amongst the variables. Based on cointegrating equations, the error correction term indicated a negative sign and was significant at 5% level (C (1) = -0.153042, .0429 p=0.05),however, Central Bank rate was found to be different from zero and significant at 5% level (.0163>p=0.05), an indication that there was a short run casualty running from the Central Bank rate to cost of credit. The study therefore recommends that for Micro finance institutions to maximize their profits they should adopt new technologies like Mobile Banking for their credit facilities, this does not require administrative and operation costs, in a bid to cope with the market shocks and frictions. Keywords: Financial Market Frictions, Flight to Quality, Cost of Credit, Kenya DOI: 10.7176/JESD/12-6-07 Publication date: March 31 st 2021

Can central banks run out of ammunition? The role of the money‐equities‐interaction channel in monetary policy

AbstractMany authorities claim that central banks ‘have run out of ammunition’, either because the central bank rate has dropped close to the zero lower bound or because of Keynes's liquidity trap. I argue first, that indefinitely large increases in the quantity of money remain possible even with the central bank rate close to zero, and, second, that increases in the quantity of money raise all asset prices, including the prices of quoted equities, not just bond prices. Bonds are an unimportant asset class in modern capitalist economies, relative to corporate equity and real estate. Meanwhile increases in equity prices always boost aggregate demand and output.

Negative Central Bank Rates and Venture Capital Markets

Negative Central Bank Rates and Venture Capital Markets

The Role of Central Bank Rate on Credit Gap in Indonesia: A Smooth Transition Regression Approach

The Role of Central Bank Rate on Credit Gap in Indonesia: A Smooth Transition Regression Approach

The Short-Run and Long-Run Effects of Central Bank Rate on Exchange Rate Volatility in Indonesia

The Short-Run and Long-Run Effects of Central Bank Rate on Exchange Rate Volatility in Indonesia

Global Banks and Interest on Excess Reserves

In this paper, we document a link between interest-on-excess-reserves (IOER) and global banks' internal capital markets. We find that foreign bank affiliates in the U.S. receive less funding from their parent banks when their home Central Bank increases the rate paid on excess reserves. We find a negative and statistically significant effect of IOER on the affiliate bank lending: a 100 basis points increase in the home Central Bank's rate on excess reserves is linked to a 2.3 percentage points decline in the U.S. credit provided by foreign bank affiliates. We exploit different organizational forms and IOER eligibility for identification. We also control for demand-side factors in a loan-level data in which borrowers have multiple lending relationships. We find that within a banking organization, the credit supply response is stronger in the affiliates that are smaller, have ex ante less profitable loans, and rely on parent bank funding. Taken together, these results are consistent with a novel channel of unconventional monetary policy where IOER crowds out global credit supply. We argue that the type of monetary policy framework matters.

Interest Rates and Growth of Private Domestic Investment in Kenya; Vector Autoregressive Econometric Approach

This study sought to determine the relationship between short term interest rate, long term interest rate, and private domestic investment in Kenya using time series quarterly data spanning 1997 to 2018. Vector autoregressive model was used to estimate the relationship. The findings show that the central bank rate and lending rate significantly impact private domestic investment. The results emphasize the role of interest rate policy and monetary policy in driving domestic private investment in Kenya. The findings of this study will be of benefit to policy makers through provision of data-based evidence that will be used as a guide while making appropriate policies to encourage growth of private domestic investment in the country leading to economic growth.

EVENT STUDY OF IPO IN INDONESIA: PUMP-AND-DUMP & FLIPPING STRATEGY ANALYSIS

There were three important IPO anomalies: the positive average initial return (improperly called short-term 'underpricing'), the long-term underperformance, and hot/cold IPO. The EVENT STUDY model explained the 'underpricing' based on the assumption that the underwriter sets the initial price equal to the market-perceived true value and investors were rational. IPO prices are affected by demand and supply. The idea of the model was to explore pump-and-dump and flipping patterns exhibited upon IPO anomalies event in Indonesia. Pump-and-dump is the strategy to manipulate stock prices, while flipping was stocks bought at the IPO and sold at early days ta listing date. This strategy oftentimes exhibits anomalous behavior. Some implications of this model for the IPO market were positive 1st-day initial return (IR) and a negative relation cumulative average abnormal 5-days abnormal return (CAAR-5days) for flipping strategy. The other was a relationship between underperformance cumulative average 30-days abnormal returns (CAAR-30days) and cumulative average 5-days (CAAR-5days) abnormal returns in terms of pump-and-dump strategy. Using the relation between the Characteristics (Size of issue, Board and Floating rate) and Macroeconomics Condition (Central Bank Rate, Inflation rate, USD/IDR exchange, and GDP growth), and the IR, a CAAR-5days and a CAAR-30days, this EVENT STUDY explained the existence of the pump-and-dump and flipping pattern in the Indonesian stock exchanges. The Authors implemented a multivariate analysis of variance (MANOVA) to test hypotheses regarding the effect of a three-variables dependent (the initial return, a 5-days abnormal return, and a 30-days abnormal return) into several dependent variables. Using the IPO data taken from 2015-2019, the paper found that this EVENT STUDY explained the existence of pump-and-dump and flipping patterns at the early trading of IPO stocks in the Indonesia Exchange Market.

DETERMINANT OF GOVERNMENT BOND YIELDS

This study aims to analyze the influence of determinant factors: (i) exchange rates, (ii) inflation, (iii) CDS spreads, (iv) bid-ask spreads, (v) overnight rate, (vi) CB’s rate (Central Bank Rate), and (vii) oil prices on Government bond yields. The data used are monthly data in the period 2012 - 2018. The research method used is the Vector Auto Regression (VAR) approach. Our analysis indicated that the determinant factors have impact on government bond yields. Based on the analysis of the impulse response function (IRF), the yield is to respond to any shocks given by the long term. While through forecast error variance decomposition (FEVD) analysis, found that CDS spreads and oil prices contributed significantly to the movement of Government bond yields.

Arima Forecasting Model for Uganda’s Consumer Price Index

In Uganda, the Central Bank watches closely inflation which happens to be one of the key macroeconomic indicators for which the central bank rate is anchored on. Uganda Bureau of Statistics disseminates monthly Consumer Price Indices (CPIs) to the various stakeholders. Currently, the CPI is computed for eight urban centres spread across the country. The monthly CPIs serve mostly those users who require past and current inflation rates. The main objective of this study is to identify and estimate an ARIMA model for the CPI and use it to make short term forecasts. We relied upon monthly Consumer Price Indices from January 2010 to July 2020 obtained from Uganda Bureau of Statistics. The time series was transformed so as to make it stationary, before identification and estimation of ARIMA (p, d, q) x (P, D, Q)₁₂ models. An ARIMA (1, 1, 1) (0, 1, 1)₁₂ with no constant was selected as the best model, because it had the least AIC and BIC. Additionally, all the coefficients of the ARs and MAs were significant at 1% level. Using the selected model, inflation forecasts were generated for 12 months (August 2020 to July 2021) and found to fluctuate between 4.7 and 6 percent. We recommend this model to Uganda Bureau of Statistics and Central Bank to use it to make forecasts and disseminate them to users. In conclusion, generally good forecasts are vital for better resource allocation, planning and decision making.

Trend Analysis as a Useful Tool for Monetary Policy in the Real Estate Market

Purpose of article: The primary purpose of this study consists in the research that focuses on developing various scenarios for central bank interest rate regulation and its impact on property prices. Partial areas include the specification of individual factors and the description of relationships between individual scenarios. Since the study is based on real data and purely numerical calculations and simple statistical methods might not cover the whole issue, the trend analysis was used. After determining the main factors, a model containing a series of scenarios will be built. Based on these scenarios and the individual relationships between them, the oriented transitional graph will be generated. The eight-dimensional model serves as an example to determine transitions between scenarios and to understand the resulting scenario map as a whole. Using this study, we can monitor current market developments and behavior both in the past, present and predict a possible sequence of events in the future. This study builds on the already explored issues and extends the state of scientific knowledge in order to build more advanced models in the future with current factors and new conclusions valid for the continuous progress in the property market. Methodology/methods: Solving with using statistical methods, correlation matrix, trend analysis. Scientific aim: It is to find the correlation that proves the possibility of finding ways to lower house prices through central bank rates. Findings: The central bank interest rate has a direct impact on the real estate market which can be observed in the onset of scenarios in the transition graph. Conclusions: The real estate bubble represented as the housing price index can be affected by the central bank interest rates with the impact on other significant variables on the market.

Interest Rate Pass-Through in Three EU Candidate Countries: The Case of Albania, North Macedonia and Serbia

The objective of the paper is to assess the interest rate pass-through in three EU candidate countries that is Albania, North Macedonia and Serbia. We rely on an error-correction model using monthly data over the period 2005-2019. Results suggest a complete interest rate pass-through in Albania, albeit it has been weakened during the economic and financial crisis. The relatively fast speed of adjustment indicates an effective interest rate transmission channel. In the Macedonian case, the changes of the monetary policy rate are transmitted completely to the bank lending rate, but not to the bank borrowing rate. The transmission via the money market rate has improved after the global economic and financial turmoil. In the case of Serbia, the results also suggest complete interest rate pass-through indicating that the monetary policy rate changes are transmitted into retail rates offered by the banks to savers and borrowers in the long run. Nevertheless, the speed of adjustment is relatively slow. In general, the estimated speed and extent of the response of money market interest rate and bank retail interest rates to changes in the monetary policy rate gives an indication of effective interest rate transmission channel in the case of Albania and Serbia. On the other hand, it is moderately effective in the case of North Macedonia given that the central bank rate changes affect mainly bank lending rate but not borrowing rate.

МЕХАНІЗМ ФОРМУВАННЯ БАНКІВСЬКОГО ПРОЦЕНТА НА МАКРОЕКОНОМІЧНОМУ РІВНІ ТА ЙОГО ЕКОНОМІКО-МАТЕМАТИЧНА МОДЕЛЬ

Показано, що сьогодні тему «Процентна ставка фактори, що на неї впливають» досить докладно висвітлено з точки зору ідентифікації та класифікації цих факторів. Проте і класичні, і сучасні теорії розглядають процентну ставку як відносини, що виникають між економічними агентами: «власник коштів (кредитор) і суб’єкт, який потребує додаткових коштів (позичальник)», не виокремлюючи при цьому банки.Банківський процент розглядається винятково на мікроекономічному рівні як скоригована, залежно від умов надання кредиту чи залучення депозиту та фінансового стану банку, фундаментальна ставка. Але невирішеним залишається запитання фундаментальної ставки, сформованої на макроекономічному рівні.У процесі прийняття рішення про розмір процентної ставки банки мають перед собою дві мети: максимізація прибутку та управління ризиками. Обгрунтовано ідею про те, що визначальними у формуванні фундаментальної ставки є фактори ризику та ефективного використання залучених коштів.Показано, що базовим фактором формування банківського процента, який поєднує в собі елементи ризику і прибутковості, є ліквідність. При цьому, під впливом законів поведінкової економіки, лінійний вплив ліквідності трансформується в еліпсоподібний. Проаналізовано, що фактори суб’єктивної властивості (ставка рефінансування центробанку, його дохідність) – фактори ефективності, та їх вплив на процентну ставку проявляється лише в контексті порівняння з впливом базового фактору. Обгрунтовано, що в умовах кризи головним мотиваційним елементом при прийнятті рішення про розмір процентної ставки стає управління ризиком відпливу коштів клієнтів. Подано модель процентної ставки і результати моделювання для банківської системи України, які є досить близькими до реальних показників ринку.

Совершенствование правил трансфертного ценообразования в Республике Армения

The article analyzes legislative novelties in the area of transfer pricing in the Republic of Armenia through the best practices comparison and countryŐs economic and institutional specifics. The authorsŐ research approach is based on determination of national economic and institutional special features and outlining the riskiest types of transfer pricing transactions. Through the collected data and the best foreign practices the authors analyze the national transfer pricing rules and policy. As a result of such analysis there are presented several practical recommendations for the modification of tax legislation and transfer pricing rules in the Republic of Armenia. The authors also suggest implementation of possibility to use stock exchange quotes as benchmarks for commodity transactions when applying comparable uncontrolled price method. Introduction of safe harbor rules is also recommended for interests of financial arrangements on related party debt, based on key rates of fiscal markets (Central Bank rate, EURIBOR, LIBOR, SHIBOR and so on). The authors also discuss in details the problems of application of thin capitalization rules in combination with transfer pricing rules and double tax treaties. In addition, the article recommends several practical ideas on streamlining tax administration (setting up transition period without fines and sanctions or testing the existing thresholds for transfer pricing control).

Are central banks really breaking the (policy) rules?

▀ Looking at the strength of the global economy, it's no surprise that simple policy rules suggest that interest rates in some advanced economies are much too low and/or that several rate hikes would be needed in 2018 to avoid falling further behind the curve. Nonetheless, we expect central banks to respond cautiously and we see a slower pace of tightening than the consensus view. ▀ Policy rules, such as the Taylor Rule, have long been considered a useful guide to the potential path for policy rates. But while it suggests that current US, Eurozone and Australian central bank rates are broadly appropriate, it signals that UK, Canadian, and Swedish rates should be substantially higher. Based on our economic forecasts, Taylor Rules suggest that the central banks in the US, Eurozone, Canada and Australia will all need to raise intertest rates by around 100bps by end‐2018. ▀ However, there are several reasons not to draw strong conclusions from such point estimates. First, the Taylor Rule requires estimates of two unobservable variables – the output gap and the natural rate of interest – which cannot be estimated precisely. ▀ Second, using models that were designed to predict US policy responses in the 1990s to forecast central banks' behaviour today is likely to be misleading. Meanwhile, inferring central banks' reaction functions from recent policy rate moves to assess the future policy path is fraught with difficulties. Not only have interest rates been broadly unchanged for the bulk of the post‐financial crisis period, but policymakers have provided other forms of policy support. ▀ Third, outside the US at least, Taylor Rules have historically pointed to persistently different policy rates from those observed, yet inflation has been well anchored. ▀ The upshot of all this is that we expect central banks in the advanced economies to err on the side of caution and anticipate interest rates rising less quickly than the consensus amongst economists.

Faktor-Faktor Yang Mempengaruhi Nilai Tukar Dollar Amerika Serikat Terhadap Rupiah Tahun 2000–2013

Exchange rate is one tool to measure a country’s economic conditions. The growth of a stable currency value indicates that the country has a relatively good economic conditions or stable. This study has the purpose to analyze the factors that affect the exchange rate of the Indonesian Rupiah against the United States Dollar in the period of 2000-2013. The data used in this study is a secondary data which are time series data, made up of exports, imports, inflation, the BI rate, Gross Domestic Product (GDP), and the money supply (M1) in the quarter base, from first quarter on 2000 to fourth quarter on 2013. Regression model time series data used the ARCH-GARCH with ARCH model selection indicates that the variables that significantly influence the exchange rate are exports, inflation, the central bank rate and the money supply (M1). Whereas import and GDP did not give any influence.

THE EFFECT OF MONETARY POLICY ON FINANCIAL PERFORMANCE OF THE COMMERCIAL BANKS LISTED ON THE NAIROBI SECURITIES EXCHANGE

Purpose: The purpose of this study was to establish the effect of monetary policy on the financial performance of commercial banks listed in the Nairobi securities Exchange in KenyaMethodology: The study adopted a descriptive survey of the commercial banks listed on the NSE. The total population consisted of all 11 commercial banks listed on the NSE as at 30 June 2015. Since the population of the study was small, the study used secondary data which was readily available from both the Central Bank of Kenya and the Nairobi Securities Exchange. All the listed commercial banks were included hence a census study.Results: The findings from the study confirmed that monetary policy tools such as CBR, CRR and OMO had varying degrees of relationship with the financial performance of the commercial banks listed on the NSE. The study also revealed that OMO rates positively influenced returns of the listed commercial banks at the NSE .This study also established that OMO rates were positively correlated with the financial performance of the commercial banks listed on the NSE while the Central bank rate and the CRR rate negatively influenced the financial performance of commercial banks listed on the NSE.Unique contribution to theory, practice and policy: This study therefore recommended that the Country should handle its macroeconomic policies appropriately as the changes in the macroeconomics like CBR, CRR and OMO bring about devaluation of the currency and affect the performance of the commercial banks listed in NSE.

Wavelet-based monetary and fiscal policy in the Euro area

This paper first applies the MODWT (Maximal Overlap Discrete Wavelet Transform) to Euro area quarterly GDP data from 1995 to 2014 to obtain the underlying cyclical structure of the GDP components. We then design optimal fiscal and monetary policy within a large state-space LQ-tracking wavelet decomposition model. Our study builds a MATLAB program that simulates optimal policy thrusts at each frequency range where: (1) both fiscal and monetary policy are emphasized, (2) only fiscal policy is relatively active, and (3) when only monetary policy is relatively active. The results show that the monetary authorities should utilize a strategy that influences the short-term market interest rate to undulate based on the cyclical wavelet decomposition in order to compute the optimal timing and levels for the aggregate interest rate adjustments. Given that central bank rates are adjusted in discrete steps, this implies that central bank monetary policy adjustments will be sub-optimal. We also find that modest emphasis on active interest rate movements can alleviate much of the volatility in optimal government spending, while rendering similarly favorable levels of aggregate consumption and investment. This research is the first to construct joint fiscal and monetary policies in an applied optimal control model based on the short and long cyclical lag structures obtained from wavelet analysis.