Central Bank Interest Rate Research Articles

ANALISIS FAKTOR-FAKTOR YANG MEMPENGARUHI RETURN ON ASSETS PADA BANK UMUM SYARIAH DAN UNIT USAHA SYARIAH (PERIODE 2010-2013)

This research based to analyze the impact of financing to deposit ratio (FDR), non perfoming finance (NPF), banking operational cost (BOPO), third party pooling fund (DPK), interest rate of central bank (BI Rate), and Inflation on return of Asset (ROA) determination Sharia Bank, this research had populate from Sharia Bank and Sharia Operational Unit during 4 years research (2010 - 2013).This research use a second type data which is known from monthly statistic Islamic Bank report published by Central Bank. The data was analyzed by double linier regretion with examine classic assumption before. The research result with parsial type (t-examine) proved that FDR, NPF, BI Rate and inflation are not impacted with ROA Islamic Bank determination and BOPO had an impact and third party pooling fund (DPK) exclude because that had a multikorealis disease so as stimultaneously analyze (F examine) NPF,FDR,BOPO, central bank interest, and infalation are significant impact to return of asset determination of Islamic Bank.

Business cycles and the expectations of short-term central bank rates in light of Construal Level Theory

Capital market investors’ capability to forecast the central bank interest rate is critical, since the latter serves as an anchor for many economic transactions. Financial-economics literature shows that the short-term forward rate is a crucial factor considered by investors in the expectation of central bank returns. Yet, it is unclear if the forward rate, a rather abstract measure, is a sufficient predictor—whether a more concrete variable, such as investors’ crisis cycle perceptions, significantly adds explanatory power to the central bank rate expectations. We examine Israeli capital market forecasting of the short-term Central Bank of Israel interest rate, i.e., a 1-to-3-month horizon, during the period 1993–2008. Beyond extracting the forward rate, we create a proxy for crisis business cycle, using local and international capital market performance. This financial setting allows us to examine the Construal Level Theory, where the abstract variable is the forward rate, the concrete variable is the economic crisis, and the construal level is the horizon length. The findings strongly support Construal Level Theory. We show that the expected central bank rate’s reliance on the abstract forward rate becomes more aggressive for longer periods. In addition, the significant positive impact of the economy’s crisis cycle on the short-horizon expected federal fund diminishes in longer horizons. Hence, there is a forecasting substitution effect between the concrete economy crisis and the abstract forward rate in the psychological distance represented by the investment horizon.

Monetary versus Macroprudential Policies Causal Impacts of Interest Rates and Credit Controls in the Era of the UK Radcliffe Report

We have entered a world of conjoined monetary and macroprudential policies. But can they function smoothly in tandem, and with what effects? Since this policy cocktail has not been seen for decades, the empirical evidence is almost non-existent. We can only fix this shortcoming in a historical laboratory. The Radcliffe Report (1959), notoriously skeptical about the efficacy of monetary policy, embodied views which led the UK to a three-decade experiment of using credit controls alongside conventional changes in the central bank interest rate. These non-price tools are similar to policies now being considered or used by macroprudential policymakers. We describe these tools, document how they were used by the authorities, and craft a new, largely hand-collected dataset to help estimate their effects. We develop a novel identification strategy, which we term Factor-Augmented Local Projection (FALP), to investigate the subtly different impacts of both monetary and macroprudential policies. Monetary policy acted on output and inflation broadly in line with consensus views today, but credit controls had markedly different effects and acted primarily to modulate bank lending.

The effects of the interest rates on bank risk in China

We use non-performing loan ratio and insolvency risk to measure bank risk and construct panel data regression models to examine the effects of the interbank market rate, central-bank rate and bank-level lending rate on bank risk in China. Empirical results show that interbank market rate and the central-bank interest rate are positively correlated with bank risk, while the bank-level lending rate is negatively correlated with bank risk. We also analyse and explain the difference between the effects of the US interest rates and China’s interest rates on its own bank risk. Finally, we put forward some policy implications.

Contemporary Monetary Policy in China: An Empirical Assessment

This paper focuses on monetary policy in China. A set of different specifications for the monetary policy reaction function are empirically evaluated using monthly data for 1998–2014. Overall, the performance of the estimated policy rules is surprisingly good. Chinese monetary policy displays countercyclical reactions to inflation and leaning-against-the-wind behaviour. The paper shows a notable increase in the overall responsiveness of Chinese monetary policy over the course of the estimation period. The central bank interest rate is unresponsive to economic conditions during the earlier years of the sample, but response becomes significant in later years. This finding comports with the view that the monetary policy of the People's Bank of China has come to place greater weight on price-based instruments. A time-varying estimation procedure suggests that the two monetary policy objectives are generally assigned to different instruments. The money supply instrument continues to be utilized to control the price level. Since 2008, the interest rate instrument has been mainly used to achieve the targeted output growth.

Asymmetric interest rate pass-through in the U.S., the U.K. and Australia: New evidence from selected individual banks

This paper provides new evidence on asymmetric interest rate pass-through in the U.S., the U.K. and the Australian economies by using the Nonlinear Auto-Regressive Distributed Lag model, central bank interest rates, lending and deposit interest rates from selected banks, spanning the period 2000–2013. The results provide evidence that corroborates the asymmetric pass-through market predictions. Robustness tests are also performed by splitting the sample period into that prior to and after the recent financial crisis. The new findings document that the asymmetric character of pass-through remains active only in the case of Australia.

Estimating Interest Rate Setting Behavior in Brazil: A LSTR Model Approach

Given limited research on monetary policy rules in emerging markets, this paper challenges the applicability of a nonlinear Taylor rule in characterizing the monetary policy behavior of the Brazilian Central Bank. It also investigates whether and how the process of setting interest rates has been developed in response to contingencies and special events. We extend the linear Taylor rule to a regime-switching framework, where the transition from one regime to another occurs in a smooth way, using a Logistic Smooth Transition Regression (LSTR) approach. In this sense, we empirically analyze the movement of the nominal short term interest rate of the Brazilian Central Bank using quarterly data, covering the period 1994.Q4–2012.Q2. We find that the nonlinear Taylor rule provides a better description of the Brazilian interest rate setting and is consistent with historical macroeconomic events. In particular, our results show that adopting a nonlinear specification, instead of the linear, leads to a costs reduction in terms of fit: 190 basis points in 1995 and 140 basis points in the mid-2002 presidential election campaign in Brazil. Moreover, the Brazilian monetary policy exhibits nonlinear patterns that better captures special events and may contain relevant information rendering it applicable to unusual conditions, i.e., a financial crisis, which require disconnection from the automatic pilot rule and use of judgement to make decision.

Inflation Targeting in Peru: The Reasons for the Success

The Peruvian central bank took two major decisions in the early 2000s: implementing an inflation target system and accumulating sufficient foreign-exchange reserves. These two decisions have allowed the central bank to preserve macroeconomic stability in favorable or unfavorable international environments. The use and impact of the main monetary policy instruments over the period 2002–2013 is discussed, namely, the short-term interest rate set by the central bank or reference interest rate, the reserve requirement ratio in local and foreign currencies, and, finally, sterilized intervention in the foreign exchange market. The process of bank credit (de)dollarization is also reviewed.

Contemporary Monetary Policy in China: A Move Towards Price-Based Policy?

​This paper focuses on monetary policy in China. A set of different specifications for the monetary policy reaction function are empirically evaluated using monthly data for 1999––2012. Variation is allowed both in the policy targets as well as in the monetary policy instrument itself. Overall, the performance of the estimated policy rules is surprisingly good. Chinese monetary policy displays countercyclical reactions to in‡ation and leaning-against-the-wind behaviour. The paper shows that there is a notable increase in the overall responsiveness of Chinese monetary policy over the course of the estimation period. The central bank interest rate is irresponsive to economic conditions during the earlier years of the sample but does respond in the later years. This finding supports the view that the monetary policy settings of the People's Bank of China have come to place more weight on price-based instruments. A time-varying estimation procedure suggests that the two monetary policy objectives are assigned to different instruments. The money supply instrument is utilised to control the price level and (after 2008) the interest rate instrument has been used to achieve the targeted output growth.

An Econometrical Analysis of the Debt Market in Albania

The paper provides an overview of the debt instruments marketed in Albania, where the highest share is outlined by treasury bills with short term maturities. The paper provides the database construction profile, econometric models applied to process the data into summarized information. The models include the role the banking system plays and should perform in this regard. The econometrical analysis uses a multiple linear regression, attempting to delineate the interrelationship amongst the discount/interest rate on 3-month tenure T-bill, the inflation rates, and the Central Bank interest rates and the budget deficit magnitude. The analysis and the respective statistical tests support the hypothesis about the strong correlation and consistent trend of a sustainable relationship of all above mentioned factors. The work includes some finding and recommendations for debt management techniques and governmental policies the Albanian authorities should undertake regarding the wideness of financial market participants in Albania, alternate opportunities and sound approaches ensuring the achievement of European standards. DOI: 10.5901/mjss.2015.v6n2p67

What Drives the Global Interest Rate

In this paper we study the drivers of global interest rate. Global interest rate is defined as a principal component for the largest developed and developing economies’ discount rates (the US, Japan, China, Euro area and India). A structural global factor-augmented error correction model is estimated. A structural change in the global macroeconomic relationships is found over 2008:09-2008:12, but not pre or post this GFC period. Results indicate that around 46% of movement in central bank interest rates is attributed to changes in global monetary aggregates (15%), oil prices (13%), global output (11%) and global prices (7%). Increases in global interest rates are associated with reductions in global prices and oil prices, increases in trade-weighted value of the US dollar, and eventually to reduce global output. Increases in oil prices are linked with increase in global inflation and global output leading to global interest rate tightening indicated by increases in central bank overnight lending rates.

What Drives the Global Interest Rate

In this paper we study the drivers of global interest rate. Global interest rate is defined as a principal component for the largest developed and developing economies’ discount rates (the US, Japan, China, Euro area and India). A structural global factor augmented error correction model is estimated. A structural change in the global macroeconomic relationships is found over 2008:09-2008:12, but not pre or post this GFC period. Results indicate that around 46% of movement in central bank interest rates is attributed to changes in global monetary aggregates (15%), oil prices (13%), global output (11%) and global prices (7%). Increases in global interest rates are associated with reductions in global prices and oil prices, increases in trade-weighted value of the US dollar, and eventually to reduce global output. Increases in oil prices are linked with increase in global inflation and global output leading to global interest rate tightening indicated by increases in central bank overnight lending rates.

Cross-border banking flows spillovers in the Eurozone: Evidence from an estimated DSGE model

This paper seeks to evaluate quantitatively how interbank and corporate cross-border flows shape business cycles in a monetary union. Using Bayesian techniques, we estimate a two-country DSGE model that distinguishes between Eurozone core and peripheral countries and accounts for national heterogeneities and a set of real, nominal and financial frictions. We find evidence of the key role of this cross-border channel as an amplifying mechanism in the diffusion of asymmetric shocks. Our model also reveals that under banking globalization, most national variables and the central bank interest rate are less sensitive to financial shocks while investment and current account imbalances are more sensitive to financial shocks. Finally, a counterfactual analysis shows that cross-border lending has affected the transmission of the recent financial crisis between the two groups of countries.

Optimal Rules for Central Bank Interest Rates Subject to Zero Lower Bound

Abstract The celebrated Taylor rule provides a simple formula that aims to capture how the central bank interest rate is adjusted as a linear function of inflation and output gap. However, the rule does not take explicitly into account the zero lower bound on the interest rate. Prior studies on interest rate selection subject to the zero lower bound have not produced derivations of explicit formulas. In this work, Taylor-like rules for central bank interest rates bounded below by zero are derived rigorously using a multi-parametric model predictive control framework. This framework is used to derive rules with or without inertia. The proposed approach is illustrated through simulations. Application of the approach to US economy data demonstrates its relevance and provides insight into the objectives underlying central bank interest rate decisions. A number of issues for future study are proposed.

Brazilian Central Bank communication and interest rate expectations

This article presents empirical evidence on the effect of regular Central Bank of Brazil (CBB) communication on volatility and the direction of the interest rates futures market. The volatility of interest rates in the financial market is observed before and after publication of regular CBB communication. Moreover, the period without publication (purdah period) is also considered. Hence, this article combines, in an original manner, the idea presented by Ehrmann and Fratzscher for evaluation of the impact of communication on financial market expectation, and the model developed by Kuttner, for analysis concerning the expectations hypothesis of the term structure of interest rate. The findings support the idea that CBB communication has an effect on expectations of changes in the interest rates and in the expected direction. Furthermore, CBB communication is more effective when made in the periods before meetings of the Monetary Policy Committee and publication of the respective minutes.

The solar systems payback effect of the price decrease of communal electric prices and of the interest rate decrease of the Central Bank

The energy is one of the most important needs of the humanity. One of its biggest challenge or danger is that the world's demand for energy continues to grow. The aim of present study is to review the introduction of solar energy utilization, the economic determination of the return of crystalline solar photovoltaic systems in Hungary, the electricity price reductions for individuals and the change in the payback period. The effect of the changing investment cost to the payback period based on the changes in electricity price reductions and in central bank interest rate is written in this study. An important question is for a household: decide by or against a solar (PV) system. The main direction of our recent research is the utilization of photovoltaic (PV) solar energy with crystalline solar systems. The research was carried out in solar-electric power plants extended from 1.5 kWp to 10 kWp. The calculation of payback time was performed by dynamic indices.

House Prices, Credit Growth, and Excess Volatility: Implications for Monetary and Macroprudential Policy

Progress on the question of whether policymakers should respond directly to financial variables requires a realistic economic model that captures the links between asset prices, credit expansion, and real economic activity. Standard DSGE models with fully-rational expectations have difficulty producing large swings in house prices and household debt that resemble the patterns observed in many industrial countries over the past decade. We show that the introduction of simple moving-average forecast rules for a subset of agents can significantly magnify the volatility and persistence of house prices and household debt relative to otherwise similar model with fully-rational expectations. We evaluate various policy actions that might be used to dampen the resulting excess volatility, including a direct response to house price growth or credit growth in the central bank's interest rate rule, the imposition of a more restrictive loan-to-value ratio, and the use of a modified collateral constraint that takes into account the borrower's wage income. Of these, we find that a debt-to-income type constraint is the most effective tool for dampening overall excess volatility in the model economy. While an interest-rate response to house price growth or credit growth can stabilize some economic variables, it can significantly magnify the volatility of others, particularly inflation.

Real Estate Market under Catastrophic Change

Within the last decade, real estate prices in Poland have changed signi cantly. We believe that these prices inevitably re ect the dynamics of the real estate market, and therefore they can be used to track its evolution path. To study whether and how the prices (regarded as a state variable) change over time depending on such control variables as gross domestic product and central bank interest rates, the theory of discontinuous change (also known as the catastrophe theory) was used. Catastrophic model assumes that small price uctuations are associated with stable, long-term development of the market, whereas rapid changes are always due to short-term instabilities. In such a picture, the system evolution path draws a smooth curve within the stability area passing continuously between neighboring equilibrium states, and it rarely enters into the instability area to jump over the potential barrier to another equilibrium state.

Do National Economic Shocks Influence European Central Bank Interest Rate Decisions? The Impact of the Financial and Sovereign Debt Crises

AbstractThis article examines the relevance of national economic conditions for European Central Bank (ECB) interest rate setting and whether the financial and sovereign debt crises have made national divergences more relevant. Officially, the ECB sets policy for the eurozone and considers only eurozone data. However, economic shocks in one or more countries may warrant a deviation from this rule. Using real‐time, forecast data, the authors estimate a modified Taylor rule incorporating two macroeconomic ‘national influence’ measures: first the difference between the median and the eurozone measures of inflation and real gross domestic product (GDP) growth, and then deviations of the measures of inflation and real GDP growth for the ‘core’ and ‘periphery’ countries from eurozone averages. Using rolling‐window analysis to test the stability of parameter estimates, evidence is found that divergences in national data – notably developments in the periphery – from eurozone averages play an increasingly important role during the financial and sovereign debt crises.

The Implied Consumer Euler Rate: What Role for Financial Frictions?

There is increasingly dissatisfaction with the traditional New Keynesian IS curve linking the interest rate to consumption. The central bank's interest rate target is found to differ significantly from the implied consumer Euler rate thus impairing the working of the (traditional) monetary transmission mechanism. We look for other determinants of the IS curve that help overcoming its weakness in matching aggregate data. We find a non-negligible role for financial frictions in general, and for the external finance premium in particular, analyzing US data for the Greenspan period. This supports the recent view (see Curdia and Woodford (2010)) that calls central banks to target credit spreads. (JEL codes: E21; E52) Copyright The Author 2012. Published by Oxford University Press on behalf of Ifo Institute, Munich. All rights reserved. For permissions, please email: journals.permissions@oup.com, Oxford University Press.