Changes In Real Interest Rates Research Articles

Determinants of banking crises (Fragility) in the Malawian banking sector

This paper studies the determinants of banking crises or fragility in Malawi. In this study we modelled banking crisis conditions in a developing country banking sector applying a Logistic Regression model using data for Malawi for the period 1980 to 2022. We embedded banking crisis dummy, bank specific and macroeconomic drivers of crisis in the model. Our study finds that under crisis conditions macroeconomic, monetary and fiscal drivers such as the ratio of external debt stock to gross national income ratio, debt service costs to primary export revenue ratio, broad money to GDP ratio, changes in real interest rates, growth in real GDP, total reserves to GDP ratio has a negative and significant impact on banking crisis and fragility in Malawi. These findings are important for policy makers especially in an environment where fiscal dominance is prevalent and drives a significant build up of domestic debt (treasury assets) on the banks’ balance sheets.

The Term Structure of Monetary Policy Uncertainty

This paper studies the transmission of Federal Reserve communication to financial markets and the economy using new measures of the term structure of policy rate uncertainty. High-frequency movements in the term structure of interest rate uncertainty around FOMC announcements cannot be summarized by a single measure but, instead, are two dimensional. We characterize these two dimensions as the Level and Slope factors of the term structure of interest rate uncertainty. These two monetary policy uncertainty factors help to explain changes in Treasury yields and forward real interest rates following FOMC announcements, even after accounting for changes in the expected path of policy rates. Finally, compared to high-frequency instruments derived from interest rate futures, our policy uncertainty factors provide stronger first-stage instruments and imply FOMC forward guidance has been more effective in stimulating economic activity in a standard proxy SVAR.

THE IMPACT OF ECONOMIC TRENDS ON BANK PROFITABILITY – THE CASE OF SERBIA AND CROATIA

This paper analyses the direction and intensity of the impact of economic trends on the profitability of banks in Serbia and Croatia in the period between the years 2006 and 2021. This paper aims to determine which indicators of economic trends have the most substantial impact on the profitability of banks in the selected countries. As key indicators of economic trends, GDP per capita, the GDP growth rate, inflation rate, real interest rate, broad money growth, general government final consumption expenditure, current account balance, gross savings, trade, and unemployment are selected as independent variables. At the same time, bank profitability was measured with bank return on equity, in percentages (ROE), and bank return on assets, in percentages (ROA) – two indicators which represent the dependent variables selected for this research. Descriptive analysis, mean difference, correlation, and univariate and multivariate regression were used in the research. Research results show that changes in real interest rates and unemployment have a significant impact on the profitability of banks in both of the selected countries, while changes in GDP per capita growth have a statistically significant effect only in Serbia, and general government final consumption expenditure has a statistically significant impact only in Croatia. The influence of other indicators of economic trends is not statistically significant.

Unusual Changes in the U.S. Treasury Security Market During the Fourth Round of Quantitative Easing

Abstract The Covid-19 Pandemic and policy response rattled the US Treasury markets. Conventional US Treasuries, inflation adjusted US Treasuries, and the relationship between the two developed in ways such that ignoring changes in real interest rates yielded distorted inflation expectations estimates. Since the beginning of the pandemic, monetary policy kept nominal rates low and close to zero, but positive. Real rates, on the other hand, became increasingly negative. The relationship between the two market rates became negatively correlated, and distorted because of the fourth round of quantitative easing, along with the Fed preventing nominal yields from turning negative. Federal Reserve actions during the Covid-19 pandemic drove a larger wedge between nominal interest rates and real interest rates in the inflation adjusted market.

주택시장과 거시경제의 관계에 관한 실증분석

The purpose of this paper is to analyze the relationship between the housing market and the macroeconomy using macroeconomic variables, and housing price variables of South Korea from the first quarter of 1991 to the fourth quarter of 2021. In consideration of the macroeconomic transmission mechanism of housing price fluctuations, I built a VAR model with variables such as real GDP, private consumption, housing investment, private credit, policy interest rate, and housing transaction price. In respect of the impulse response, the result of the analysis showed that housing prices rose when real GDP, private consumption, housing investment, and private credit had risen. When housing prices rose, real GDP, prices, private consumption, private credit, and policy interest rates rose. As a result of forecast error variation decomposition, I found that the contribution of changes in housing prices to changes in each variable was not significant, but changes in real GDP and interest rates had a major impact on changes in housing prices. In the historical decomposition I performed, the contribution of policy interest rates to fluctuations in housing prices was also high. In particular, private credit was considerably affected by the rapid increase in housing prices in 2020. Based on the above results, I found that the increase in housing prices had a relatively long-term impact on the credit market but a poor impact on the real economy through increased consumption and housing investment, while I confirmed that the GDP and interest rates had a major effect on changes in housing prices.

Are Central Banks’ Monetary Policies the Future of Housing Affordability Solutions

Housing affordability is one of the major social problems in many countries, with some advocates urging governments to provide more accessible mortgages to facilitate more homeownership. However, in recent decades more and more evidence has shown that unaffordable housing is the consequence of monetary policy. Most of the previous empirical studies have been based on econometric analyses, which make it hard to eliminate potential endogeneity biases. This cross-country study exploited the two global interest rate shocks as quasi-experiments to test the impacts and causality of monetary policy (taking real interest rates as a proxy) on house prices. Global central banks’ synchronized reduction in interest rates after the outbreak of the COVID-19 pandemic in 2020 and then the global synchronized increase in interest rates after the global inflation crisis in 2022 provided both a treatment and a treatment reversal to test the monetary policy hypothesis. The stylized facts vividly reveal the negative association between interest rate changes and house price changes in many countries. This study further conducted a ten-country panel regression analysis to test the hypothesis. The results confirmed that, after controlling for GDP growth and unemployment factors, the change in real interest rate imposed a negative effect on house price growth rates. The key practical implication of this study pinpoints the mal-prescription of harnessing monetary policy to solve housing affordability issues, as it can distort housing market dynamics.

Identification Robust Empirical Evidence on the Open Economy IS‐Curve

AbstractExisting empirical evidence on the Euler equation based on closed economy models suggests low responsiveness of aggregate consumption to changes in interest rates. We incorporate open economy features and consider extensions that include habit formation and hand‐to‐mouth consumers. For several open economies and applying econometric methods that are robust to weak instruments and structural changes, we continue to find low values for the elasticity of intertemporal substitution, implying a small effect of real interest rate changes on aggregate income. In some countries, structural changes are informative for identification, but otherwise aggregate data provide limited information to learn about IS‐curve specifications.

A comparative techno-economic assessment of manually adjustable tilt mechanisms and automatic solar trackers for behind-the-meter PV applications

Many studies in the literature aim to increase the amount of solar radiation falling on photovoltaic (PV) panel surface to improve its performance. Most of these studies concentrate on solar tracking systems and few studies focus on manually adjustable tilt mechanisms. However, no studies in the literature compare these two methods techno-economically. Therefore, as its main contribution, this study makes a techno-economic comparison of solar trackers and manually adjustable tilt mechanisms. First, the electricity production of fixed-tilt, manually adjustable tilt mechanisms (monthly and seasonal adjustment), and automatic solar trackers (single-axis east-west (SA-EWT), single-axis south-north (SA-SNT), and dual-axis (DAT)) systems are technically analyzed for three provinces in Turkey with different solar characteristics. After that, the systems are compared economically and evaluated over levelized cost of electricity (LCoE), discounted payback period (DPBP), and internal rate of return (IRR). Finally, a detailed sensitivity analysis is made and the impact of changes in initial investment costs and real interest rates is examined. Eventually, the payback period of fixed-tilt systems is found to be 10.3–13.3 years in Turkey. Dual-axis solar trackers provide the highest electricity production increase (30.4–34.6%) compared to fixed-tilt but with the highest payback period (16.7–24 years) among all alternatives. Monthly manual tilt adjustment provides the most feasible solution by decreasing the payback period of fixed-tilt systems by around 8 months to 9.6–12.6 years and with an electricity production increase of 3.6–5%.

The impacts of Uncertainty on the Industrial Product: Empirical Evidence with the PVAR Model

The interest rates and uncertainty are supposed to play an important role on the agents' decisions. This study has two main objectives. First, we verify the impact of industrial output to the investments and real interest rates shocks in mercusur countries using the PVAR model through the GMM system (1997-2016). The results of the estimates show, on the one hand, that industrial production responds positively and statistically significant to changes in investments and, on the other one, it responds negatively to changes in real interest rates. Granger's causality test suggests that investments and interest rates Granger-cause the industrial product. Second, we present empirical evidence of the role of uncertainties in the agents' investment decision-making process, considering only the case of Brazil (2002-2016). We find that the industrial product and investments increase with the agents' confidence on the federal government future behavior but decrease when uncertainties raise.

The interest rate exposure of euro area households

We estimate the “unhedged interest rate exposure” (URE) of euro area households. The URE, defined by Auclert (2019), is a welfare metric that captures the extent to which households are exposed to changes in real interest rates, and allows an assessment of the redistributive effects associated with monetary policy decisions.We examine the distribution of UREs along the net wealth, income, age and housing status distributions for the euro area as a whole and for individual countries, and document substantial heterogeneity across these dimensions. Households at the lower end of the net wealth distribution, younger households and mortgagors have negative interest rate exposure and would lose out from an increase in interest rates, all else being equal. Wealthy households, higher income and older households, as well as outright homeowners would stand to benefit.The heterogeneity of exposures across euro area countries is largely attributable to the differences in the prevalence of adjustable rate mortgages (ARMs). Averaging across households in euro area countries, households in Austria, Germany, Italy and Malta stand to benefit from an increase in the interest rate, whereas households in Cyprus, Ireland, the Netherlands, Portugal and Spain would lose out.

The effectiveness of monetary policy and output fluctuations: An asymmetric analysis

AbstractPrevious studies have investigated asymmetries in the effects of monetary policy on the real economic activity by using either vector autoregressive (VAR)‐based regime‐switching models with smooth transition technique or Gaussian functions to parameterise the dynamic effects of structural shocks on the economy. These kinds of VAR models assume asymmetry as a short‐run relationship between the series since the long‐run neutrality hypothesis of money states that monetary policy can only affect productive capacity of the economy in the short run, but not in the long run. The recent theoretical literature shows that this hypothesis is not quite right. Thus, this paper examines the extent to which monetary policy has a long‐run asymmetric effect on output in a number of Organisation for Economic Co‐operation and Development countries by using a nonlinear hidden cointegration analysis within a likelihood‐based panel framework. The findings indicate that there is a long‐run relationship between the real interest rate as an indicator of monetary policy and the growth rate of real output in five countries out of nine under review. This gives support for the view that output has responded asymmetrically to the real interest rate changes. The economic implication of our results is that monetary policy affects positive and negative output fluctuations differently.

Foreign Exchange System in Nepal: A Theoretical Perspective

International economic relation and trade are occurred in different currency system. The currency of one country may not be tendered in another country. So, the natural person or organization requires buying the currency of target country. In fact it is the process of converting one currency into another currency, which makes globalization and international trade possible. Buying and selling of currency is made in spot market, forward market, futures market, swap market, and option market. Additionally, change in real price, structural change, speculation, inflation, interest rate, public debt, and status of terms of trade make effect in equilibrium position of exchange rate. Yet, demand and supply of the currency determine appreciation and depreciation of currency. Policy exchange rate is accepted as fixed rate, floating rate, crawling band, crawling peg, conventional fixed peg arrangement, pegged exchange rate within horizontal band peg, currency board, dollarization and no separate legal tender. Earlier mint par theory was universally accepted. However, in contemporary time, balance of payment theory and purchasing power parity theory are accepted as theories of foreign exchange. Market transaction is made through hedging, speculation, and arbitrage etc. Exchange control is made through unilateral method and bilateral method. Unilateral method includes bank rate policy, import and export policy, exchange equalization fund, exchange pegging, multiple exchange rates, rationing of foreign exchange, and blocked account whereas bilateral method includes clearing agreement, payment agreement, installment agreement, differed payment agreement, and compensation agreement etc as per necessity. Nepal has accepted fixed peg exchange rate regime with Indian currency and flexible exchange rate regime with rest of the currencies.

Differences in Euro-Area Household Finances and their Relevance for Monetary-Policy Transmission

This paper quantifies the extent of heterogeneity in consumption responses to changes in real interest rates and house prices in the four largest economies in the euro area: France, Germany, Italy, and Spain. We first calibrate a life-cycle incomplete-markets model with a liquid financial asset and illiquid housing to match the large heterogeneity of households asset portfolios, observed in the Household Finance and Consumption Survey (HFCS) for these countries. We then show that the heterogeneity in household finances implies that responses of consumption to changes in the real interest rate and in house prices differ substantially across the analyzed countries, and across age groups within these countries. The different consumption responses quantified in this paper point towards important heterogeneity in monetary-policy transmission within the euro area.

The associations between stock prices, inflation rates, interest rates are still persistent

Purpose This paper aims to examine the effect of both inflation rate and interest rate on stock prices using quarterly data on non-financial firms listed in DJIA30 and NASDAQ100 for the period 1999-2016. The stock duration model is used to measure the sensitivity in variations in inflation rates and interest rates on stock prices. Design/methodology/approach The authors use standard statistical tools that include Johansen cointegration test, linearity, normality tests, cointegration regression, Granger causality and vector error correction model. Findings The results of panel Johansen cointegration analysis show that cointegration exists between the stock prices, the changes in stock prices due to inflation rates and the changes in stock prices due to real interest rates. The results of cointegration regression show that inflation rates are negatively associated with stock prices, the real interest rates and stock prices are positively associated, changes in real interest rates and inflation rates Granger cause significant changes in stock prices, significant speed of adjustment to long run equilibrium between observed stock prices and real interest rates and significant speed of adjustment to long run equilibrium between changes in stock prices due to real interest rates and changes in inflation rates. Originality/value This paper contributes to the empirical literature in three ways. The paper examines the effects of inflation and interest rates on stock prices differently from other related studies by separating inflation from real interest rates. The paper examines the causality between stock prices, interest and inflation rates. This paper offers significant updated validity to extended literature that a negative association exists between stock prices and inflation rates. This validity can be considered as an existence a theory of stock prices, inflation rates and interest rates.

Research on the Abnormal Growth of Chinese Household Savings Under the Effect of “Negative Interest Rate”

At present, China has once again entered the era of negative interest rate, but China’s residents’ savings have shown a phenomenon of extraordinary growth. The coexistence of negative interest rate and high savings makes the effect of savings rate weaken the effect of monetary policy. This paper conducts an empirical quantitative analysis of the nominal interest rate, real interest rate and the growth rate of Chinese residents’ savings from 1978 to 2017, in order to and studies the influence and change relationship between the nominal interest rate and real interest rate on Chinese savings. The results show that the nominal interest rate and Chinese household savings change in the same direction, while the real interest rate changes in the opposite direction. In the long run, the sensitivity of both nominal and real interest rates to savings decreases and tends to be stable. It is concluded that savings are still the means of maintaining and increasing the value of the public residents when the inflation rate is relatively obvious. The author analyzes the reasons and disadvantages on this basis. Finally, it points out that we should stick to the general direction of interest rate liberalization reform, improve residents’ consumption ability, and deal with the negative interest rate effect with “Chinese characteristics” flexibly.

The Nonlinear Interaction of Real Estates and Economic Growth in China

This paper provides a model for verifying the effects of real estate, because real estate industry has a fairly important position in the Chinese economy. This paper uses the nonlinear optimized techniques to estimate EGARCH(1,1)-GED model. Due to autocorrelation, kurtosis and volatility clustering, this paper adopt the EGARCH(1,1)-GED model. This paper uses monthly data of gross domestic products, housing prices, interest rates, exchange rates, consumer prices and stock price index, and the analysis period is 18 years from January 2000 to December 2017, The empirical findings are as follows. First, the rise in housing prices increases both the return and volatility of GDP growth of China. The empirical findings that changes in housing prices have a greater impact on GDP growth of China than changes in interest rates are consistent to prior studies. Second, we found that changes in new housing prices have a relatively greater impact on economic growth than changes in existing housing prices. This empirical result is a new one that has not been found in previous studies. Third, changes in real interest rates have a relatively greater impact on GDP growth in China than changes in normal interest rates. Fourth, in contrast to the significant impact of Beijing’s housing prices on economic growth, the housing prices in Hong Kong has shown insignificant impact on GDP growth in China. According to these findings, real estate development has an effect in the GDP growth of China. In light of the empirical results, China’s policy authorities should monitor the price trends of the new housing prices and make efficient management accordingly.

Differences in Euro-Area Household Finances and Their Relevance for Monetary-Policy Transmission

This paper quantifies the extent of heterogeneity in consumption responses to changes in real interest rates and house prices in the four largest economies in the euro area: France, Germany, Italy, and Spain. We first calibrate a life-cycle incomplete-markets model with a financial asset and housing to match the large heterogeneity of households asset portfolios, observed in the Household Finance and Consumption Survey (HFCS) for these countries. We then show that the heterogeneity in household finances implies that responses of consumption to changes in the real interest rate and in house prices differ substantially across the countries, and within countries by household characteristics such as age, housing tenure, and asset positions. The different consumption responses quantified in this paper point towards important heterogeneity in monetary-policy transmission within the euro area.

The Interest Rate Exposure of Euro Area Households

We estimate the unhedged interest rate (URE) of euro area households. The URE is a welfare metric that captures the extent to which households are exposed to changes in real interest rates, and reflects the direct gains and losses in interest income flows incurred by households after such a change. It is defined as the difference between maturing assets and maturing liabilities at a given point in time (Auclert 2019). We examine the distribution of the UREs along the net wealth, income, age and housing status distributions for the euro area as a whole and for individual countries, and document substantial heterogeneity across these dimensions. The median household in the euro area has a positive interest rate exposure, indicating that it would gain, in the first instance, from an increase in the interest rate, all other things remaining constant. Households in the lower end of the net wealth and income distribution, younger households and mortgagors, have negative interest rate exposure and would lose from an increase in interest rates. The heterogeneity across countries is largely attributed to the differences in the prevalence of adjustable rate mortgages (ARMs). Countries with a high prevalence of ARMs have interest rate exposure distributions skewed to the left, with negative mean interest rate exposure. Interest gains/losses after a monetary policy shock can be substantial for households with negative interest rate exposure, particularly for mortgagors, and of a similar (absolute) magnitude to capital gains/losses from associated changes in house prices. Besides the direct distributional consequences and the implications for monetary policy, the distribution of the interest rate exposures may help explain the general public's views with the respect to the prevailing monetary policy regime or the central bank.

Globalization, Market Power, and the Natural Interest Rate

We argue that strong globalization forces have been an important determinant of global real interest rates over the last five decades, as they have been key drivers of changes in the natural real interest rate—i.e. the interest rate consistent with output at its potential and constant inflation. An important implication of our analysis is that increased competition in goods and labor market since the 1970s can help explain both the large increase in real interest rates up to the mid-1980s and—as globalization forces mature and may even go into reverse, leading to incrementally rising market power—its subsequent and protracted decline accompanied by lower inflation. The analysis has important implications for monetary policy and the optimal pace of normalization.

How will persistent low expected returns shape household economic behavior?

AbstractMany believe that global capital markets will generate lower returns in the future versus the past. We examine how persistently lower real returns will reshape work, retirement, saving, and investment behavior of older persons using a calibrated dynamic life cycle model. In a low return regime, workers build up less wealth in their tax-qualified 401(k) accounts versus the past, claim social security benefits later, and work more. Moreover, the better-educated are more sensitive to real interest rate changes, while the least-educated alter their behavior less. Interestingly, the distribution of wealth is more uniform in periods of persistent low expected returns.