Decline In Interest Rates Research Articles

The coming long-run slowdown in corporate profit growth and stock returns

Over the past two decades, the corporate profits of stock market listed firms have been substantially boosted by declining interest rate expenses and lower corporate tax rates. This note's key finding is that the reduction in interest and tax expenses is responsible for a full one-third of all profit growth for S&P 500 nonfinancial firms over the prior two-decade period.

Understanding Swiss real interest rates in a financially globalized world

This paper proposes long-run estimates of ex ante real interest rates in Switzerland and other developed economies, and it describes their relative evolution. Our results highlight the decline in—and convergence of—global real interest rates that has unfolded over the last three decades for all maturities. While Swiss yields stand out as being particularly low and stable from a historical perspective, we find that Swiss interest rates have fallen less than in many other countries during the last decade. We then examine whether the reduction in the interest differential is related to a lower attractiveness of the Swiss franc. Focusing on the difference of Swiss minus German real government bonds yields, we find a significant increase in expected real depreciation of the Swiss franc and a somewhat lower convenience yield for Swiss bonds—the convenience yield reflecting the non-pecuniary value that investors impute to the liquidity of a given bond. In contrast, the safety premium in favor of the Swiss franc increased and therefore cannot explain the smaller decline in real interest rates in Switzerland. The last part of the paper analyzes the negative convenience yield on Swiss government bonds and its recent decline. We show that both the purchase of government bonds by foreign central banks and foreign exchange interventions by the Swiss National Bank may have contributed to this decline by reducing the relative supply of foreign versus domestic government bonds.

The Need for Speed: The Impact of Capital Constraints on Strategic Misconduct

Under what conditions do firms engage in strategic misconduct? Why do they undertake actions that increase profitability yet break laws or violate strong norms often with costly consequences for public welfare? The strategic management literature offers two external constraints that might explain these actions. First, firms in highly competitive environments with few options for differentiation turn to strategic misconduct for survival. Second, firms that operate in weak regulatory environments adopt strategic misconduct to overcome market frictions that lack of regulation creates. This paper offers a third explanation – access to affordable financing. Existing research on capital constraints has demonstrated firms benefit greatly from additional capital but has yet to investigate its impact on strategic misconduct. I examine the impact of capital constraints on strategic misconduct in the minibus taxi industry in South Africa. Exploiting a natural experiment in which a financing company changed their interest rates due to nation wide protests, I assess the impact of declining interest rates on over 5000 firms from 2015 to 2020. Using an instrumental variable analysis, I find that firms given lower interest rates decrease strategic misconduct, measured by speeding alerts and aggressiveness with other firms, and are more likely to survive. Exploring potential mechanisms through survey and qualitative analysis, I find suggestive evidence that binding capital constraints and high penalties for default might drive these results. My findings suggest that the reduction of capital constraints for firms under duress might increase both firm survival and public safety presenting implications for how we might approach building sustainable and resilient firms and communities.

VALUATION OF EMBEDDED OPTIONS IN NON-MARKETABLE CALLABLE BONDS: A NEW NUMERICAL APPROACH

The issue of how to price options embedded in callable bonds has attracted a lot of interest over the years. The usual bond valuation methods rely on yield curves, risk premium, and other parameters to estimate interest rates used in discounted cash flow calculations. The option to retire the bond is, however, neglected in the standard pricing models, causing a systematic overvaluation of callable bonds. In the event of a decline in interest rates, investors are exposed to the risk of a lower return on investment than indicated by the yield to maturity. We propose a novel approach to valuing the risk that the issuer will use the right to buy back the bond at a specific call price. While prior models are focused on valuing marketable callable bonds, we deliver a unique approach to valuing bonds with an embedded European option (or a multiple option) that are traded solely through private transactions. These can typically be characterized by the lack of historical records on transaction prices. The modular character of calculation we propose allows us to take into account additional information, such as probable behaviour of the issuer, available opportunities for achieving alternative earnings or different estimates in terms of interest rate development.

IMPACT OF CORONAVIRUS (COVID-19) ON THE GLOBAL ECONOMY

The COVID-19 pandemic and associated lockdowns have hit the global economy and affected the basis of the socio-economic and business models, which have already undergone some complex changes. Industrialized countries are witnessing a steady decline in interest rates and GDP growth rates, possibly due to medium-term demographic and technological changes, a growing demand for savings assets, and increasing divergences between individuals, firms, and regions. In conditions of the demographic transition, pension provision and health care are placing an additional burden on the state budget. These trends are increasingly restricting monetary and fiscal policy to stabilize the economy in the event of adverse shocks. On the technological side, the digitalization of consumption and production requires structural adjustments in various areas in order to remain competitive and create new opportunities for displaced jobs. For a number of years, globalization has been facing serious obstacles associated with growing protectionism and skepticism about the universal benefits due to ever-increasing international trade and financial integration. The article focuses on the interaction of these trends and the shock caused by COVID-19. International economics and economic policy deal mainly with macroeconomic, trade and technological aspects. The article concluded that measures to restore the economy should be comprehensive, not limited to individual areas.

Empirical evaluation of monetary policy transmission to stock markets and further transfer of macroeconomic shocks to the real sector

The study focuses on revealing key monetary policy instruments that can influence stock market development and elaborating whether shocks from financial markets and other macroeconomic conditions are further transferred to the real sector, as expected under the monetary transmission mechanism. This paper is an extension of our previous theoretical and empirical research expanding to ten developed and eight developing economies for the period of 1999-2020 using panel data and vector autoregressive models, impulse response functions, and scenario analysis. Firstly, it was examined that actions of monetary policymakers were efficient for stimulating the development of stock markets mostly for developed countries, whereas stock indices in most developing countries seemed not to be sensitive to changes in monetary conditions. Using scenario analysis and impulse response functions, it was discovered that in developing countries, including Poland and Ukraine, an expansionary policy focused on increasing money supply would mitigate deceleration and facilitate the growth of stock indices in the next four quarters, whereas, in developed countries, including the USA, a decline in interest rates under expansionary regime would stimulate the development of stock markets. Finally, the evolution of financial markets together with macroeconomic, social, and political conditions was concluded to be a statistically important factor of economic growth, as initially expected.

The Natural Rate of Interest Through a Hall of Mirrors

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.

Government Debt and Capital Accumulation in an Era of Low Interest Rates

This essay discusses the reasons for and implications of the decline in real interest rates around the world over the past several decades. It suggests that the decline in interest rates is largely explicable from trends in saving, growth, and markups. In this environment, greater government debt is likely not problematic from a budgetary standpoint. But a Ponzi-like scheme of perpetual debt rollover might fail, and such a failure would make a bad state of the world even worse. In addition, even if a perpetual debt rollover succeeds, the increased debt could still crowd out capital, reducing labor productivity, real wages, and consumption.

Average Inflation Targeting in a Low-Rate Environment

One significant change in the US economy in the last 20 years is the trend decline in real interest rates that pushes the policy rate near the effective lower bound (ELB) and puts downward pressure on inflation. This environment leaves conventional monetary policy tools less effective in accommodating adverse shocks. To better achieve the Federal Reserve’s dual mandate at the ELB, the FOMC adopted a new framework called average inflation targeting (AIT). In this Commentary, I demonstrate that AIT is a better policy in a low-rate environment because of its ability to anchor inflation expectations, and I present possible implications of the flexible implementation of AIT.

Rising wealth inequality: Intergenerational links, entrepreneurship, and the decline in interest rate

The share of wealth held by the top one percent of Americans has increased from about 24% in 1980 to 40% in 2010. This paper examines the role played by the decline in the world interest rates in accounting for this observation. Our model consists of households who either run a business or work for others. In this environment, the decline in the interest rate increases wealth inequality since entrepreneurs benefit from lower financing costs while workers face lower returns. This channel can account for over 60 percent of the increase in the top wealth shares in the data.

Monetary policy application and stock market reaction during Covid-19 Pandemic: Evidence from Turkey

We investigate whether the pandemic announcement and three monetary policies changed after that (reducing target interest rate) have an impact on the return, liquidity, and volatility in the Turkish stock market. We find that there is a negative reaction to the pandemic announcement and the announcement of the first decline in interest rates, but we discover a positive reaction to the second and third reduction in interest rates in terms of stock return and liquidity. Moreover, the stock return and liquidity of firms that are listed on the BIST-100 index and have associated derivatives are affected less by the pandemic. Results also suggest that the smallest, illiquid, volatile, and highly searched companies on Google are affected more by the pandemic announcement and the first decline in the interest rate.

The Capitalist Spirit and Endogenous Growth

The aim of the study is to investigate the influence of the capitalist spirit in conjunction with the distribution of income on economic growth. The capitalist spirit is represented by the fact that savings rates increase with increasing relative income. We extend an endogenous AK growth model in an overlapping generational framework by implementing imperfect competition and Cournot competition. Using this model, we investigate the influence of profits on the intra- and inter-generational distributions of income and economic growth. While increasing incomes lead to a more unequal intra-generational distribution and to a redistribution of income from the old to the young generation, the impact on economic growth is in general ambiguous, although under specific assumptions it becomes positive. Furthermore, the model shows that increasing market power of firms is associated with declining labor and capital shares, declining interest rates, and an increased wealth-to-income ratio.

Money and inflation in Switzerland

This paper characterizes the relationship between monetary aggregates, inflation and economic activity in Switzerland since the mid-1970s. Traditional forms of money demand and quantity theory relationships have remained stable over the whole period. Broad money excesses over trend values, accounting for a secular decline in interest rates and thus in trend velocity, have been followed by persistently higher inflation and output with the usual monetary policy transmission lags. Money and exchange rate fluctuations can explain the major inflation developments in Switzerland over the past four decades.

The Secular Decline in Interest Rates and the Rise of Shadow Banks

The Secular Decline in Interest Rates and the Rise of Shadow Banks

The effect of the nature of the financing activity on interest rates and Murabaha rates in the emerging economy

This study aimed to get acquainted with the impact of the nature of financing activity on the interest rates and Murabaha rates prevailing in commercial banks and microfinance institutions (MFIs) in Jordan, as the main object of microfinance activity is to reduce poverty and unemployment (Lal, 2018). The study used the descriptive and analytical approach to evaluate the extent of variation in interest rates among different financing sectors. The study used a t-test for independent samples to test the extent of statistically significant differences between the interest rates and Murabaha rates between the three types of activity; the one-way analysis of variance (ANOVA) test was also used to test the variance in interest rates between the MFIs. The study found statistically significant differences between fixed interest rates, declining interest rates imposed by MFIs, and interest rates in commercial banks, and between Murabaha rates used in MFIs and Murabaha rates in Islamic banks. Fixed interest rates, declining interest rates, and Murabaha rates were higher in MFIs than the commercial banks and Islamic banks which oppose the main object of a microfinance institution that is helping poor families and small institutions gain access to financial services, The study found statistically significant differences between the interest rates of the MFIs themselves. The study recommended tightening control over the microfinance sector or capping its interest rates (Heng, Chea, & Heng, 2021) to match the interest rates and Murabaha rates in it along with the cost of obtaining funds and operational costs in these institutions.

Early Exposure and Its Impact on Cardiothoracic Surgery: an Experience of Medical Education in The United Kingdom.

Cardiothoracic surgery (CTS) has seen a decline in interest and application rates in recent years. As a relatively small speciality, teaching and placements in CTS are often not included during undergraduate study and postgraduate training. We aim to evaluate the exposure to CTS during both undergraduate study and postgraduate training. A ten-question online survey was designed and delivered to Foundation Year Two (FY2) doctors who graduated in 2017 and completed their two-year postgraduate foundation training in 2019. Medical schools with no graduates in 2017 and 2018 were excluded from our study. IBM® SPSS Statistics, version 25, and Microsoft Excel 365® were used for Student's t-test statistical analysis. Three hundred and six FY2 doctors across 16 medical schools completed the survey, none of which included compulsory CTS attachments as their undergraduate curriculum. Thirty-two respondents (10.5%) underwent CTS attachments lasting between one to three weeks. Only 14 (43.8%) had worked in a cardiothoracic unit during their two-year Foundation Programme; 10 of which (71.2%) subsequently made an application for cardiothoracic speciality training. Most of the participants with previous exposure to CTS, during either undergraduate study or postgraduate Foundation Programme training or both, were significantly more likely to make an application to CTS training (P<0.05). Our study suggests that doctors with increased exposure to CTS during undergraduate study and postgraduate training are more likely to pursue a career in CTS. Targeted interventions at both stages may improve interests in CTS and the number of prospective applicants.

Between the world of economics and the world of physical sciences there would be a link that is anything but hypothetical

The compatibility between humanity and nature should be related to a trend that would lead us hopefully in a short time to the full neutrality between man and the planet we all live on. Along this trend, essentially due to the cooperation and help of science and knowledge, the humankind is able to collect news and information on the level of pollution we produce, not to be exceeded. Individually, the information on the pollution degree received from nature comes to us through the monetary system. Therefore, the community is warned that we are approaching a limit not to be exceeded in creating pollution inside the environment and the warning comes through the nominal price system, that is through inflation and deflation. These two are nothing more than messages, like ectoplasms, that is a sort of symbols taking shape due to the economic instability and, once inside the economic environment, they lose contact with the economic entourage. Nor could it be otherwise, because their task is for information purposes only, and they must create within the community the loss of confidence in the economic outlook. Due to this loss of trust, the economy slows down and takes a pause in favor of the environment quality, which improves thanks to the reduced economic activity. It’s a sort of alert system with the same message function both for inflation and deflation. However, their fate is anyway different not for a natural reason but for the different response given by monetary policy upon arrival of inflation or deflation. In the case of inflation, the monetary policy response is the symmetry between nominal price increases and interest rates. This increase in rates is producing a cycle retreat that is consistent with the request for a pause of the natural system. While in the case of deflation, the symmetry between the decline in nominal prices and interest rates is in contrast with the economic system demanding for a pause. This potential opposition can cause some anomalies in the wealth and income distribution.

Mixed participating and unit-linked life insurance contracts: design, pricing and optimal strategy

In many countries, the decline in interest rates has reduced the interest in traditional participating life insurance contracts with investment guarantees and has led to a shift to unit-linked policies without guarantees. We design a novel mixed insurance contract splitting premium payments between a participating and a unit-linked fund. An additional guarantee fee is applied on the unit-linked return in order to increase the investment guarantee of the participating fund. In a utility-based framework, using power utility and prospect theory as preference functions, we show that the mixed product is usually perceived more attractive than a full investment in either the unit-linked or the participating contract. The guarantee fee is beneficial for conservative investors interested in stronger protection against losses. This is also interesting from a marketing perspective: By the increase of the guarantee in the participating product, zero or negative guaranteed rates can be avoided.

Organizational and Personal Drivers of the Financial Sector: A Focus Group of Banking Officials in Pakistan

Purpose: This study intends to explore the key challenges the financial sector faces today about employees’ perspectives and how these challenges eventually play a role in the employee’s work-life balance.&#x0D; Design/Methodology/Approach: A Focus group was conducted with a leading multinational bank in Pakistan. Six managerial cadre employees participated in the focus group study. The focus group analysis suggests very stringent rules and regulations incorporated by SBP that bind each bank to undergo strict compliance.&#x0D; Findings: The challenge of customer retention, declining interest rates, coping with the frugal economic situation of the country, meeting customer satisfaction, incorporating personal relationship management, use of ancillary support services by customers, reward and recognition to employees, dealing with information savvy knowledgeable customers, work-life balance and overall motivation of the bank employees are assumed by the participants as the key challenges that drive the banking industry of Pakistan.&#x0D; Implications/Originality/Value: Senior management of the banking sector of Pakistan can learn from the problems discussed, and the possible solution proposed to the said problems. This research contributes to the body of knowledge while explaining the issues faced by the professionals working in the banking sector of Pakistan.

Kaldor and Piketty’s facts: The rise of monopoly power in the United States

The macroeconomic data of the last fifty years have overturned at least two of Kaldor’s famous stylized growth facts: constant interest rates, and a constant labor share. At the same time, the research of Piketty and others has introduced several new and surprising facts: an increase in the financial wealth-to-output ratio in the US, an increase in measured Tobin’s Q, and a divergence between the marginal and average returns on capital. In this paper, we argue that these trends can be explained by an increase in market power and pure profits in the US economy—that is, the emergence of a non-zero-rent economy—along with forces that have led to a persistent long-term decline in real interest rates. We make three parsimonious modifications to the standard neoclassical model to explain these trends. Using recent estimates of the increase in markups and the decrease in real interest rates, we show that our model can quantitatively match these new stylized macroeconomic facts.