Effects Of Changes In Interest Rates Research Articles

Inflation, Interest, and the Secular Rise in Wealth Inequality in the United States: Is the Fed Responsible?

Two hallmarks of U.S. monetary policy since the 1981–1982 recession are declining interest rates and moderation in inflation, at least until recently. Coincident with these trends was a surge in U.S. wealth inequality, with the Gini coefficient up by 0.070 between 1983 and 2019. This article analyzes the connection between these two developments on the basis of the Survey of Consumer Finances. Contrary to expectations, the article finds that these two monetary effects reduced wealth inequality rather than increasing it. The effect is quite sizeable, with the Gini coefficient declining by 0.045 over these years. Asset price changes and debt devaluation also accounted for 72.6 percent of the advance of mean wealth and would have led to a 204.9 percent gain in median wealth compared to its actual rise of 23.4 percent. Moreover, they helped lower the racial wealth gap rather than enlarging it. These results are at odds with previous literature in which estimates range from a weak negative effect on inequality to neutral, small positive, and strong positive. In terms of methodology, this article differs from previous work by focusing on only the direct effects of interest rate changes and inflation on the household balance sheet.

Do the Effects of Interest Rate Changes Depend on Inflation?

Do the Effects of Interest Rate Changes Depend on Inflation?

Asymmetries, uncertainty and inflation: evidence from developed and emerging economies

This paper examines the asymmetric impact of economic policy uncertainty (EPU) and oil price uncertainty (OPU) on inflation by using a Nonlinear ARDL (NARDL) model, which is compared to a benchmark linear ARDL one. Using monthly data from the 1990s until August 2022 for a number of developed and emerging countries, we find that the estimated effects of both EPU and OPU shocks are larger when allowing for asymmetries in the context of the NARDL framework. Further, EPU shocks, especially negative ones, have a stronger impact on inflation than OPU ones and capture some of the monetary policy uncertainty, thereby reducing the direct effect of interest rate changes on inflation. Since EPU shocks reflect, at least to some extent, monetary policy uncertainty, greater transparency and more timely communications from monetary authorities to the public would be helpful to anchor inflation expectations.

The Effect of Interest Rate Changes on Exchange Rate in Egypt (An Applied Study)

This study aims to measure the impact of interest rate on deposits on exchange rate and measure the effect of interest rate on loans on exchange rate. The first hypothesis states that interest rate on deposits don’t effect on exchange rate. The second hypothesis states interest rate on loans don’t effect on exchange rate, The researcher will be relying on a combination of inductive and deductive approaches to carry out two types of study are as follows: An Analytical study through the analysis of books, periodicals, theses related to interest rate and exchange rate. An applied study, The study period has been applied on monthly weighted average interest rate on loans and deposits and monthly weighted average exchange rate in Egypt for the period from January 1, 2021, till march 31, 2022) relying on the Excel program to prepare data. The results of the statistical study to test the first hypothesis show that: a weak positive relationship between the independent variable (Weighted Average Interest Rates deposits) and the dependent variable (exchange rate). The higher Interest Rates deposits, the higher the value of exchange rate. The results of the statistical study to test the second hypothesis show that: a positive relationship between the independent variable (Interest Rates on loans) and the dependent variable (exchange rate).The higher Interest Rates on loans, the higher the value of exchange rate. KeyWords: Interest rate on deposits, Interest rate on loans, Exchange Rate

Monetary transmission with income risk*

AbstractIn periods of distress, observed and perceived income risk tends to rise. Does this heightened income risk affect monetary transmission? This paper first shows that in partial equilibrium, heightened income risk dampens the substitution effect of interest rate changes but amplifies the indirect income effect of wage changes. The effects are sizable in partial equilibrium. An increase in income risk consistent with heightened risk during recessions affects interest rate and wage responses by around one‐third. However, because income risk dampens the effects of interest rate changes but amplifies the effects of wage changes, its effect is weaker in general equilibrium, dampening monetary transmissions to consumption by around 11 percent.

The Effect of Interest Rate Changes on Consumption: An Age-Structured Approach

Interest rates have generally trended downward over the past several decades. It has made borrowing cheaper, which has encouraged people to spend more. It has also made saving less attractive, contributing to increased consumption. At the same time, the role of household credit increased significantly. The paper suggests a model for the effect of an interest rate change on household consumption, which relies on income and loans. The model is based on methods of the optimal control theory. The approach is age-structured: households reconsider their consumption patterns at the moment of the interest rate change and the changes in consumption patterns are age dependent. The consumption changes for different age groups contribute to the modification of aggregate consumption. Numerical simulation shows that a decrease in the interest rate leads to a consumption boost (a substantial increase in consumption in the short run), which diminishes as time passes and consumption becomes fully adjusted to the new interest rate value. The consumption boost is achieved by an increase in the debt load.

The Role of Maturity Gaps and Short-Term Market Interest Rates on Interest Rate Risk Exposure in Commercial Banks in Kenya

Commercial banks engage in maturity transformation and the term premium compensates them for bearing the associated duration risk. They are thus exposed to interest rate risk which is the bank's financial condition to adverse movements in interest rates and represents one of the key forms of risk that banks face as financial intermediaries. The study investigated the role of maturity gaps and short-term market interest rates on interest rate risk exposure in commercial banks in Kenya. This study adopted a panel data research design in methodology to analyze the critical interest rate risk drivers across the banking sector in Kenya. The study period covered 2005-2015. The study was informed by Expectations Hypothesis theory. Correlational research design was used and captured both cross-sectional and longitudinal dimensions of the effects of the variables under investigation that is Maturity gaps ratio (MGRs) and Interest Rate Sensitivity Ratio (IRSRs). The Interest rate risk (IRR) was expressed as a function of maturity gaps, interest rate sensitivity ratio and short-term market interest rates. STATA software was used as the tool for data manipulation. The findings indicated that that a rise in Maturity Gap 2, Maturity Gap 3, Maturity Gap 4, Maturity Gap 5, Interest Rate Sensitivity Ratio 2, Interest Rate Sensitivity Ratio 3, Interest Rate Sensitivity Ratio 4, 91DayTbill and 182DayTbill led to a decrease in the interest rate risk exposure for the commercial banks. However, an increase Maturity Gap 1, Interest Rate Sensitivity Ratio 1, Interest Rate Sensitivity Ratio 5 and 364DayTbill led to an increase in the interest rate risk exposure for the commercial banks. The study recommends that banks should have interest rate risk measurement frameworks that capture all material sources of interest rate risk and that measure the effect of interest rate changes in ways that are consistent with the scope of their activities. The assumptions underlying the system should be clearly understood by risk managers and bank management. Further, banks must establish and enforce operating limits and other practices that maintain exposures within levels consistent with their internal policies. The findings are important in formulation of policies and strategies for enhancing maturity transformation in the banking industry in the country. Keywords: Maturity Gap Ratio, Interest Rate Risk Sensitivity Ratio, Interest Rate Risk Exposure, Short-Term Market Interest Rates & Commercial Banks.

The Relationship Between BIST100 Index Return and the Central Bank of the Republic of Turkey Interest Rate Decisions

Stock prices are affected by many economic and political factors. Interest rate, one of the macroeconomic indicators, is one of the important factors that are thought to affect share prices in the stock market. Central banks determine the interest rates of short-term loans given to banks and borrowing from banks. Through this interest rate, it aims to affect the general level of prices. A change in the interest rate changes the cost of borrowing and thus affects the firms’s profitability and ability to pay dividends. Again, change in interest rate can affect the opportunity cost of equity investments and this in turn affects stock prices. In this study, it is aimed to determine whether the interest rate decisions taken by the CBRT Monetary Policy Committee cause abnormal returns on stock prices. In Borsa Istanbul, the existence of abnormal returns with the effect of interest rate changes was investigated by event study method. Using 131-month data between May 2010 and March 2021, the presence of abnormal returns around the date of 30 meetings, when the decision to change the interest rate, was tested on the BIST100 index. As a result, it has been determined that interest rate change decisions have a very low effect on the BIST100 index. Although the effect on the index was observed within five days after the date of the interest rate increase/decrease decision, it was observed that this effect remained very weak.

Bank lending in Switzerland: Driven by business models and exposed to uncertainty

We study the bank lending channel in Switzerland over three decades using unbalanced quarterly bank-individual data spanning 1987 to 2016. We take an agnostic stance on which bank characteristic drives the heterogeneous lending responses to interest rate changes, and estimate the relevant classification of banks. In addition, our empirical model allows for within-group regime-specific lending responses, determined by a latent, estimated state indicator. No single bank characteristic identifies clearly the relevant classification of banks, as several characteristics determining banks’ business models underlie banks’ heterogeneous lending responses. The bank lending channel does not prevail continuously over the observation period. The overall negative effect of interest rate changes on loan growth is partly muted during periods when uncertainty is unusually low or high.

Monetary Policy and Personal Income Distribution: A Survey of the Empirical Literature

ABSTRACT The purpose of this paper is to conduct a survey of the recent literature that evaluates, in an empirical way, the distributional impacts of monetary policy. In the first two sessions, we discuss, respectively, the transmission channels of monetary policy to income distribution and the empirical strategies used to measure it. The majority of surveyed papers find that a contractionary monetary policy worsen the income distribution, and that an expansionist policy tends to improve it. Moreover, several papers found that the higher is the redistributive impact of fiscal policy, the lower is the impact of monetary policy on inequality. Another outcome with empirical support is the role of the labor share on total income: the higher is this share, the higher is the impact of monetary policy on inequality. The last point discussed is the asymmetric effects of contractionary and expansionary monetary policy. There is evidence that increases in interest rates have statistically significant effects on income distribution, whereas the effects of reductions in interest rates are not statistically different from zero. This empirical finding goes against the conventional view that the distributional effects of interest rate changes are temporary and likely to net out over the business cycle.

An Assessment of the Impact of Credit Risk Management and Performance on Loan Portfolio at International Bank Liberia

This research entitled “An Assessment of the impact of credit risk management and performance on loan portfolio at International Bank Liberia Limited from 2015-2017 contributed to the body of knowledge to the beneficiaries. It findings are also important for the Central Bank to use in monitoring credit scoring and history across all commercial bank with in the country. This study was quantitative in nature, and involves mathematical modelling in order to determine the effect of changes in interest rates on profit and net worth of the sampled banks. This study uses panel data and assumes that the effect of interest rate changes vary across the observations and over time, therefore the use of stochastic econometric (panel regression analysis) process is appropriate. The population of the study will consist of 150 credit staffs and other staffs of IBLL. The study adopt a census study and collect data for two years from 1st January, 2015 to 31st December, 2017 and the researcher used sample out 85 respondents representing 57% as the sample size from the population of 150 persons from the study area. The findings reveals that it was established from the study that 25% of the respondents who were picked from the institution agreed that credit score is one of the major system used by the bank in determining loan and 32% selected credit history. It was also observed that that bank operate within a defined credit granting criteria. The findings also show that IBLL established a system of independent, ongoing assessment of the bank‟s credit risk management. It was proven that 48% of the respondents agree while 41% strongly agree. It was established that IBLL have a loan risk management policy in place. This policy is very crucial in providing guidelines on how to manage the various risks the bank encounter in their lending activities. Members of the bank and regulators are those responsible for the formulation of the credit policy with less input from employees.

The impacts of interest rate changes on US Midwest farmland values

PurposeThis paper quantifies the effects of recent Federal Reserve interest rate changes, specifically recent hikes and cuts in the federal funds rate since 2015, on Midwest farmland values.Design/methodology/approachThe authors apply three autoregressive distributed lag (ARDL) models to a panel data of state-level farmland values from 1963 to 2018 to estimate the dynamic effects of interest rate changes on the US farmland market. We focus on the I-states, Lakes states and Great Plains states. The models in the study capture both short-term and long-term impacts of policy changes on land values.FindingsThe authors find that changes in the federal funds rate have long-lasting impacts on farmland values, as it takes at least a decade for the full effects of an interest rate change to be capitalized in farmland values. The results show that the three recent federal funds rate cuts in 2019 were not sufficient to offset the downward pressures from the 2015–2018 interest rate hikes, but the 2020 cut is. The combined effect of the Federal Reserve's recent interest rate moves on farmland values will be positive for some time starting in 2022.Originality/valueThis paper provides the first empirical quantification of the immediate and long-run impacts of recent Federal Reserve interest rate moves on farmland values. The authors demonstrate the long-lasting repercussions of Federal Reserve's policy choices in the farmland market.

An age-structured model for the effect of interest rate changes on consumption

A model for the effect of an interest rate change on household consumption is developed. The approach is age-structured: households reconsider their consumption patterns at the moment of the interest rate change and the changes of the consumption patterns are age dependent. These changes for different age groups contribute to the modification of aggregate consumption. Numerical simulation shows that a decrease of the interest rate leads to a consumption boost (a substantial increase of consumption in the short run), which diminishes as time passes and consumption gets fully adjusted to the new interest rate value. The consumption boost is achieved by an increase of the debt load.

Inflation, Interest, and the Secular Rise in Wealth Inequality in the U.S.: Is the Fed Responsible?

Two hallmarks of U.S. monetary policy since the 1981-1982 recession have been declining interest rates and moderation in inflation. Coincident with these trends has been a surge in U.S. wealth inequality, with the Gini coefficient up by 0.070 between 1983 and 2019. This paper analyzes the connection between these two developments on the basis of the Survey of Consumer Finances. Contrary to expectations, the paper finds that these two monetary effects have reduced wealth inequality rather than increasing it. The effect is sizeable, with the Gini coefficient declining by 0.045 over these years. Asset price changes and debt devaluation accounted for 72.6 percent of the advance of mean wealth over 1983-2019. They also would have led to a 204.9 percent gain in median wealth, compared to the actual rise of 23.4 percent. Moreover, they have helped lower the racial wealth gap rather than enlarging it. These results are at odds with previous literature in which estimates range from a weak negative effect on inequality to neutral, small positive, and strong positive. In terms of methodology, this paper differs from previous work by focusing on only the direct effects of interest rate changes and inflation on the household balance sheet.

Micro-level transmission of monetary policy shocks: The trading book channel.

We open the black box of the monetary policy transmission mechanism with a granular model that considers the balance-sheet composition and network relationships of each economic agent. Though there are several well-documented channels through which monetary policy operates, we focus on the overlooked trading book channel, which arises because of adjustments in the accounting value of trading book exposures on banks’ balance sheets that have to be marked to market when interest rates change. Variations in banks’ net worth due these adjustments are used as input to a network model that incorporates the financial and corporate sectors. The framework permits us to determine the effects of interest rate changes on every bank and firm in the economy and any second-round (contagion) effects in the short run. We apply the model to a comprehensive database of Brazilian banks and firms from 2015 to 2020. We find that interest rate shocks affect more strongly financial stability in periods of monetary policy tightening. We also find notable asymmetric effects of positive and negative interest rate shocks in the Brazilian economy, with positive interest rate shocks affecting more financial stability. Finally, our results also suggest a non-linear relationship between interest rate changes and financial stability, reinforcing the need to mitigate monetary policy shocks through interest rate smoothing and adequate communication and transparency to society.

The impact of interest rate changes on stock returns of private banks accepted in Tehran Stock Exchange

The main objective of this research is to study the effect of interest rate changes on stock returns of private banks accepted in Tehran Stock Exchange. The research hypotheses test was performed by regression analysis using the ordinary least squares (OLS) method and combined data. The statistical population of the research includes three private banks accepted in Tehran Stock Exchange which their seasonal returns are studied during a 6-year period from 2005 to 2010. Levin-Lin-Chu unit root test indicates that the interest rate variable and other variables are reliable at the first order difference. Results show that the interest rate has a significant negative effect on the stock return of private banks accepted in the stock exchange with 95% confidence level. So, one unit change in the interest rate leads to 10.83 units decrease in the stock return of private banks accepted in Tehran Stock Exchange.

Interest rate bands of inaction and play-hysteresis in domestic investment – Evidence for the Euro Area

The interest rate is an important monetary policy tool to steer investment to safeguard price stability. Knowledge about the exact shape of the interest rate-investment nexus is thus decisive for the European Central Bank’s efficacy. This is especially so in the currently observed low interest rate environment. We first present a theoretical framework of the hysteretic impact of changes in the interest rate on macroeconomic investment under certainty and under uncertainty to investigate whether uncertainty over future interest rates in the Euro area hampers monetary policy transmission. In this non-linear model, strong reactions in investment activity occur as soon as changes of the interest rate exceed a zone of inaction, that we call ‘play’ area. Second, we apply an algorithm describing path-dependent play-hysteresis to estimate investment hysteresis using data on domestic investment and interest rates on corporate loans for 5 countries of the Euro area in the period ranging from 2001Q1 to 2018Q1. We find hysteretic effects of interest rate changes on investment in most countries. However, their shape and magnitude differ widely across countries which poses a challenge for a unified monetary policy. By introducing uncertainty into the regressions, the results do not change much which may be due to the interest rate implicitly incorporating uncertainty effects in investment decisions, e.g. by risk premia.

The Impact of Federal Reserve's Conventional and Unconventional Monetary Policies on Equity Prices

I estimate the effects of the Federal Reserve's forward guidance and large-scale asset purchases, along with the effects of interest rate changes under conventional policy, on the U.S. equity market, and assess the reasons for stock price responses. Although the overall stock market respond meaningfully to a surprise change in the federal funds rate with a high level of statistical significance, a heterogeneity in responses is observed among different sectors in the stock market. In contrast, forward guidance is found to have relatively homogeneous effects on sector-wise stock market performance. Such effects are large in magnitude and highly statistically significant. However, large-scale asset purchases exhibit minimal effects on equity price movements. The present value of future excess returns emerged as the most important channel through which the surprise changes in the federal funds rate as well as forward guidance and large-scale asset purchases affect current equity prices. The present value of future dividends and the real interest rates are found to make minor contributions the propagation of policy shocks. However, the relative contribution of future dividends, real interest rates and excess returns vary across sectors.

An excel-based method to enhance the study of “Duration and Convexity” in financial management education

Many concepts in the study of financial management involve complex equations that require manipulating and testing with varying parameters in order to understand the relationships inherent in these equations. Such is the case with the concepts of Bond Duration and Convexity that are taught in such financial management courses as “Financial Futures, Options and Swaps” and “Analysis of Fixed Income Securities” among others. This paper, in comparison to time-consuming mathematical hand calculations, includes Excel-based methods for solving both Duration and Convexity problems in just minutes. In addition, these models are also helpful in classroom settings to explain the effect of interest rate changes on bond price.

How do Interest Rate Changes Affect Mortgage Curtailments? Evidence from China

AbstractThis study uses a unique data set of adjustable‐rate mortgages in China to investigate the effect of interest rate changes on mortgage curtailments. A distributed lag model shows that on average, the cumulative curtailment over four months increases by about RMB 1,856 in response to a 1 percentage point increase in interest rates. Further analyses show that the degree of responsiveness of mortgage curtailments depends on the direction of the interest rate changes: curtailments are more responsive to interest rate increases than to decreases. We also find significant heterogeneity in borrowers’ curtailment responses.