Implicit Interest Rate Research Articles

Optimal chonsei to monthly rent conversion choice given borrowing constraints

Chonsei, an exceptional but prevalent housing rental system in the Republic of Korea, functions as private loans between individuals, and its implicit interest rate is called the “chonsei to monthly rent conversion rate”. Although the chonsei to monthly rent conversion rate is much higher than the interest rate of savings accounts or mortgage loans, making chonsei a more expensive channel of financing, chonsei remains a dominant type of rent in Korea. This study provides a novel theoretical model in a continuous-time portfolio selection framework that allows a lessor, given borrowing constraints, to optimally choose between chonsei and monthly rent contracts to show a possible solution to this situation. We investigate the optimal choice between chonsei and the monthly rent of lessors using a rigorous theoretical model and find a closed-form solution to the model. We analyze how credit availability in the banking sector affects the choice problem, showing that the lessor may prefer the chonsei contract over the monthly rent contract, given the borrowing limit from a bank. In addition, we analyze the impact of other major factors, such as the market price of risk, the amount of chonsei deposit, the monthly rental rate, and the income rate, on the lessor’s optimal decision between chonsei and monthly rent.

Determinants of Net Interest Margin in Commercial Banks in Viet Nam

This riveting study dives into the dynamics of net interest margin (NIM) within Vietnam’s commercial banking sector from 2007-2018, offering fresh perspectives by considering factors like mergers and foreign ownership ratios. Our findings unveil a positive correlation between NIM and variables such as credit risk, risk aversion, loan-to-customer ratio, implicit interest rate, foreign equity ratio, and inflation. Conversely, NIM takes a hit with better management efficiency, during mergers, and in times of economic crises. Interestingly, ownership and GDP growth rate remain neutral, showing no influence on NIM.This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium provided the original work is properly cited.

Synthetic forwards and cost of funding in the equity derivative market

This study introduces a new technique to recover the implicit discount factor in the derivative market using only European put and call prices: this discount is grounded in actual transactions in active markets. Moreover, this study identifies the implied cost of funding, over OIS, of major market players. Does a liquid equity market allow arbitrage? The key idea is that the (unique) forward contract -built using the put-call parity relation- contains information about the market discount factor: by no-arbitrage conditions we identify the implicit interest rate such that the forward contract value does not depend on the strike.The procedure is applied to options on S&P 500 and EURO STOXX 50 indices. There is statistical evidence that, in the EURO STOXX 50 market, the implicit interest rate curve coincides with the EUR OIS one, while, in the S&P 500 market, a cost of funding of, on average, 34 basis points is added on top of the USD OIS curve.

Trade Credit and Product Pricing: The Role of Implicit Interest Rates

Abstract We empirically investigate the proposition that firms charge premia on cash prices in transactions involving trade credit. Using a comprehensive panel data set on product-level transaction prices and firm characteristics, we relate trade credit issuance to price setting. In a recession characterized by tightened credit conditions, we find that prices increase significantly more on products sold by firms issuing more trade credit, in response to higher opportunity costs of liquidity and counterparty risks. Our results thus demonstrate the importance of trade credit for price setting and show that trade credit issuance induces a channel through which financial conditions affect prices.

Interest Liberalization and the Estimation of Implicit Interest Rates in China's Banking Sector

China's interest rate liberalization process has yet to be completed. Despite removal of deposit interest rate ceilings on 23 October 2015, controls like window guidance are still imposed to prevent commercial banks from setting interest rates freely. This paper estimates implicit interest rates in China (i.e., the additional yield to official interest rates that banks must pay to attract deposits) using headquarter-level data of 88 commercial banks from BankScope and branch-level data of 317 branches in 90 counties and 14 provinces for the period 2005–13. The econometric methods allow for both heterogeneity and spatial correlation in banks’ behavior to better capture the characteristics of the Chinese banking industry. Three main findings emerge from this study. First, the estimated mean implicit interest rate is between 70 percent and 78 percent of the explicit interest rate—ignoring implicit interest rates results in underestimation of funding costs. Second, a 1 percent increase in deposit interest rates is estimated to decrease implicit interest rates by 0.44 percent, implying that the cost of interest rate liberalization will be smaller than the increase in deposit interest rates. Third, small share-holding banks, city commercial banks and rural commercial banks pay higher implicit interest rates than large state-owned banks. To promote efficient resource allocation, therefore, interest rate liberalization needs to be firmly pursued but its impact on different types of banks needs to be closely monitored to minimize disruptions to the real economy.

Comments by Zhao Chen, on Interest Liberalization and the Estimation of Implicit Interest Rates in China's Banking Sector

November 01 2017 Comments by Zhao Chen, on Interest Liberalization and the Estimation of Implicit Interest Rates in China's Banking Sector Author and Article Information Online Issn: 1536-0083 Print Issn: 1535-3516 © 2017 by the Asian Economic Panel and the Massachusetts Institute of Technology2017Massachusetts Institute of Technology Asian Economic Papers (2017) 16 (3): 309–310. https://doi.org/10.1162/asep_a_00578 Cite Icon Cite Permissions Share Icon Share Facebook Twitter LinkedIn MailTo Views Icon Views Article contents Figures & tables Video Audio Supplementary Data Peer Review Search Site Citation Comments by Zhao Chen, on Interest Liberalization and the Estimation of Implicit Interest Rates in China's Banking Sector. Asian Economic Papers 2017; 16 (3): 309–310. doi: https://doi.org/10.1162/asep_a_00578 Download citation file: Ris (Zotero) Reference Manager EasyBib Bookends Mendeley Papers EndNote RefWorks BibTex toolbar search Search Dropdown Menu toolbar search search input Search input auto suggest filter your search All ContentAll JournalsAsian Economic Papers Search Advanced Search Zhao Chen: This paper provides empirical evidence about implicit interest rates in China's banking sector, a topic that has not been well addressed by existing literature. To my understanding, the contribution of this paper is not only that it provides evidence from a developing country on this topic, but also that it is very important information for policymakers concerning further financial deregulation in China. There is a large growing literature on financial sector friction and misallocation in China. It is without question that China's financial sector needs to deregulate further and interest rate liberalization will of course be one of the main tasks of financial deregulation. Nonetheless, the Chinese government needs to know more about the micro aspects of the financial sector to have a smoother transition toward a deregulated financial system. The authors find that the implicit interest rate accounts for 70–78 percent of the explicit interest rate in... You do not currently have access to this content.

Comments by Iikka Korhonen, on Interest Liberalization and the Estimation of Implicit Interest Rates in China's Banking Sector

November 01 2017 Comments by Iikka Korhonen, on Interest Liberalization and the Estimation of Implicit Interest Rates in China's Banking Sector Author and Article Information Online Issn: 1536-0083 Print Issn: 1535-3516 © 2017 by the Asian Economic Panel and the Massachusetts Institute of Technology2017Massachusetts Institute of Technology Asian Economic Papers (2017) 16 (3): 308. https://doi.org/10.1162/asep_a_00577 Cite Icon Cite Permissions Share Icon Share Facebook Twitter LinkedIn MailTo Views Icon Views Article contents Figures & tables Video Audio Supplementary Data Peer Review Search Site Citation Comments by Iikka Korhonen, on Interest Liberalization and the Estimation of Implicit Interest Rates in China's Banking Sector. Asian Economic Papers 2017; 16 (3): 308. doi: https://doi.org/10.1162/asep_a_00577 Download citation file: Ris (Zotero) Reference Manager EasyBib Bookends Mendeley Papers EndNote RefWorks BibTex toolbar search Search Dropdown Menu toolbar search search input Search input auto suggest filter your search All ContentAll JournalsAsian Economic Papers Search Advanced Search Iikka Korhonen: This paper offers empirical estimation of “implicit” interest paid on deposits by Chinese banks. It argues that because of explicit interest rate caps, Chinese banks have been forced to offer other monetary rewards to attract deposits. Moreover, these implicit interest rates are almost comparable in size to explicit interest rates, or those allowed by the regulator. I find the empirical results quite believable, and they have an important implication for interest rate liberalization in China (which has already happened): Actual effects of liberalization on banks’ behavior and, for example, profitability may be much smaller than many people previously thought. This is an important result for many reasons. First, banks’ financial standing post-liberalization might be much better than we previously thought, as they are able to reduce implicit interest payments. Second, the stability of the banking sector need not be jeopardized because of interest rate liberalization per se; banks... You do not currently have access to this content.

Summary of the General Discussion on “Interest Liberalization and the Estimation of Implicit Interest Rates in China's Banking Sector”

November 01 2017 Summary of the General Discussion on “Interest Liberalization and the Estimation of Implicit Interest Rates in China's Banking Sector” Author and Article Information Online Issn: 1536-0083 Print Issn: 1535-3516 © 2017 by the Asian Economic Panel and the Massachusetts Institute of Technology2017Massachusetts Institute of Technology Asian Economic Papers (2017) 16 (3): 311–312. https://doi.org/10.1162/asep_a_00579 Cite Icon Cite Permissions Share Icon Share Facebook Twitter LinkedIn MailTo Views Icon Views Article contents Figures & tables Video Audio Supplementary Data Peer Review Search Site Citation Summary of the General Discussion on “Interest Liberalization and the Estimation of Implicit Interest Rates in China's Banking Sector”. Asian Economic Papers 2017; 16 (3): 311–312. doi: https://doi.org/10.1162/asep_a_00579 Download citation file: Ris (Zotero) Reference Manager EasyBib Bookends Mendeley Papers EndNote RefWorks BibTex toolbar search Search Dropdown Menu toolbar search search input Search input auto suggest filter your search All ContentAll JournalsAsian Economic Papers Search Advanced Search Wing Thye Woo led the discussion with a number of comments on Shen's representation of China's banking sector. First, in describing the activities of China's banking sector, Woo advised the authors to consider using the term implicit deposit rate premium rather than implicit interest, because this change in terminology more directly conveys the measurement of payment above and beyond the explicit interest rate. Next, Woo cautioned that the bank maximization problem is more complex than it is in the paper. In particular, the model treats the revenue per loan, ra, as exogenous. Although the exogeneity assumption may be an accurate representation of China's banking sector in 2005, however, Woo argued that assumption of exogeneity was no longer appropriate by 2013. Instead, Woo suggested that the modeling of bank decisions in 2013 should allow for the endogenous selection of both ra and the implicit interest rate, im... You do not currently have access to this content.

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Fiscal costs of monetary policy: indirect effects of an interest rate shock on Brazilian public net debt

ABSTRACT: The paper estimates the fiscal cost of an increase in the Brazilian policy interest rate - the SELIC - by considering not only the direct effect on the yield of public bonds that are indexed to the SELIC, but also indirect effects on: (i) the yield of public bonds that are indexed to the exchange rate and inflation, and (ii) the stock of public net debt through adjustments in the value of international reserves measured in domestic currency. Projections are based on the estimation of the relationship between interest rates, exchange rates and inflation by means of a vector auto-regression. We conclude that the inclusion of such indirect effects has an ambiguous effect on the response of the implicit interest rate on public net debt to shocks in the SELIC, when adjustments in the value of international reserves are not considered. However, the inclusion of the latter amplifies the fiscal cost of a more restrictive monetary policy. These results call for a better coordination between monetary, fiscal and exchange rate policies in Brazil.

Cambium non est mutuum: exchange and interest rates in medieval Europe

A major gap in our understanding of the medieval economy concerns interest rates, especially relating to commercial credit. Although direct evidence about interest rates is scattered and anecdotal, there is much more surviving information about exchange rates. Since both contemporaries and historians have suggested that exchange and rechange transactions could be used to disguise the charging of interest in order to circumvent the usury prohibition, it should be possible to back out implied interest rates from exchange rates. The analysis presented in this article is based on a new dataset of medieval exchange rates collected from commercial correspondence in the archive of Francesco di Marco Datini of Prato, c. 1383–1411. It demonstrates that the time value of money was consistently incorporated into market exchange rates. Moreover, these implicit interest rates are broadly comparable to those received from other types of commercial loan and investment. Although on average profitable, the return on any individual exchange and rechange transaction did involve a degree of uncertainty that may have justified their non‐usurious nature. However, there were also practical reasons why medieval merchants may have used foreign exchange transactions as a means of extending credit.

The Macroeconomic Effects of the Federal Reserve's Unconventional Monetary Policies

After reaching the effective lower bound for the federal funds rate in late 2008, the Federal Reserve turned to two unconventional policy tools -- quantitative easing and increasingly explicit and forward-leaning guidance for the future path of the federal funds rate -- in order to provide additional monetary policy accommodation. We use survey data from the Blue Chip Economic Indicators to infer changes in private-sector perceptions of the implicit interest rate rule that the Federal Reserve would use following liftoff from the effective lower bound. Using our estimates of the changes over time in private expectations for the implicit policy rule, and estimates of the effects of the Federal Reserve's quantitative easing programs on term premiums derived from other studies, we simulate the FRB/US model to assess the actual economic stimulus provided by unconventional policy since early 2009. Our analysis suggests that the net stimulus to real activity and inflation was limited by the gradual nature of the changes in policy expectations and term premium effects, as well as by a persistent belief on the part of the public that the pace of recovery would be much faster than proved to be the case. Our analysis implies that the peak unemployment effect -- subtracting 1¼ percentage points from the unemployment rate relative to what would have occurred in the absence of the unconventional policy actions -- does not occur until early 2015, while the peak inflation effect -- adding ½ percentage point to the inflation rate -- is not anticipated until early 2016.

The Macroeconomic Effects of the Federal Reserve’s Unconventional Monetary Policies

After reaching the effective lower bound for the federal funds rate in late 2008, the Federal Reserve turned to two unconventional policy tools—quantitative easing and increasingly explicit and forward leaning guidance for the future path of the federal funds rate—in order to provide additional monetary policy accommodation. We use survey data from the Blue Chip Economic Indicators to infer changes in private‐sector perceptions of the implicit interest rate rule that the Federal Reserve would use following liftoff from the effective lower bound. Using our estimates of the changes over time in private expectations for the implicit policy rule, and estimates of the effects of the Federal Reserve’s quantitative easing programs on term premiums derived from other studies, we simulate the FRB/US model to assess the actual economic stimulus provided by unconventional policy since early 2009. Our analysis suggests that the net stimulus to real activity and inflation was limited by the gradual nature of the changes in policy expectations and term premium effects, as well as by a persistent belief on the part of the public that the pace of recovery would be much faster than proved to be the case. Our analysis implies that the peak unemployment effect—subtracting 1¼ percentage points from the unemployment rate relative to what would have occurred in the absence of the unconventional policy actions—does not occur until early 2015, while the peak inflation effect—adding ½ percentage point to the inflation rate—is not anticipated until early 2016.

The Macroeconomic Effects of the Federal Reserve's Unconventional Monetary Policies

After reaching the effective lower bound for the federal funds rate in late 2008, the Federal Reserve turned to two unconventional policy tools--quantitative easing and increasingly explicit and forward-leaning guidance for the future path of the federal funds rate--in order to provide additional monetary policy accommodation. We use survey data from the Blue Chip Economic Indicators to infer changes in private-sector perceptions of the implicit interest rate rule that the Federal Reserve would use following liftoff from the effective lower bound. Using our estimates of the changes over time in private expectations for the implicit policy rule, and estimates of the effects of the Federal Reserve's quantitative easing programs on term premiums derived from other studies, we simulate the FRB/US model to assess the actual economic stimulus provided by unconventional policy since early 2009. Our analysis suggests that the net stimulus to real activity and inflation was limited by the gradual nature of the changes in policy expectations and term premium effects, as well as by a persistent belief on the part of the public that the pace of recovery would be much faster than proved to be the case. Our analysis implies that the peak unemployment effect--subtracting 1-1/4 percentage points from the unemployment rate relative to what would have occurred in the absence of the unconventional policy actions--does not occur until early 2015, while the peak inflation effect--adding 1/2 percentage point to the inflation rate--is not anticipated until early 2016.

Gender differences in time preferences

This paper reports the results from a large online experiment in which we examine gender differences in time preferences. Subjects choose in different situations between receiving an immediate payment and receiving a different sum later. We find that more men than women are impatient and choose to receive the immediate payment, at least if the implicit interest rate of the “late” option is neither too high nor too low.

Monetary Policy, Implicit Interest Rate, and Relative Net Trade Credit

This paper investigates the effects of monetary policy on the implicit interest rate of trade credit as well as the probability the firm becomes net trade borrower. We also construct the implicit interest rate as the difference between creditors and debtors over the sum of both. Our results show that a tightening in monetary policy leads to: (i) increase interest rate of trade credit, (ii) become firms in trade borrowers, (iii) generate divergence in the cost of trade credit among firms of the same industry sector, and (iv) create a complementarity effect in prices between trade and bank financing.

Bank Fundamentals and Market Discipline in Azerbaijan

Using quarterly panel data for banking sector in Azerbaijan from 2007:1 and 2011:4, we examine the effectiveness of market discipline mechanisms in the banking sector. We employ 3SLS method to capture the contemporaneous interaction between deposits growth rate and the implicit interest rate. Besides, as Azerbaijan is an oil-rich country, we also analyze the effect of transfers from oil fund on the market discipline.

Exchange Rates, Macroeconomic Fundamentals and Risk Aversion

This paper shows that under absence of arbitrage opportunities the exchange rate reacts to restore equilibrium in international bond markets. The key factors determining its value are the difference between realized and implicit interest rate differentials, the underlying risk premium in bond markets and changes in market expectations on the long run exchange rate. The application of this model to the macroeconomy reveals the importance of the risk premium for setting monetary policy. We find that a relative increase/decrease in the risk premium between foreign and domestic debt markets increases/decreases the influence of foreign monetary policy for shifting real output.

Thailand's Student Loans Fund: Interest rate subsidies and repayment burdens

Government student loan schemes typically have implicit interest rate subsidies which, while these are a cost to taxpayers, they have the benefit of diminishing repayment burdens for graduates. Our goal is to illustrate the extent of both interest rate subsidies and repayment burdens with respect to Thailand's Student Loans Fund (SLF), using methods pioneered in measurement terms by Ziderman (1999, 2003). Our critical innovation is to calculate repayment burdens for graduates with widely differing earnings, and we find that these generally are relatively low because the SLF is heavily subsidized. Even so, for graduates with very low income the burdens can be high. Importantly we analyze and illustrate what the repayment streams would be if the SLF was redesigned to have no interest rate subsidies and find that the burdens increase to extremely high levels for the lowest income graduates. The results are considered in the context of the analysis of income contingent loan schemes for Thailand presented in Chapman and Lounkaew (this issue).

Market Discipline in Turkey Before and After the 2001 Financial Crisis

This paper compares the effectiveness of market discipline mechanisms in the banking sector before and after the 2001 financial crisis in Turkey. It employs an empirical model that incorporates the contemporaneous feedback effects between deposits growth rate and the implicit interest rate. Using 3SLS procedure, the results show that market disciplinary forces in Turkey have been effective both before and after the 2001 financial crisis. The findings show that the effect of the implicit interest rate on deposits becomes more sensitive to bank risk fundamentals after the 2001 financial crisis. Depositors, on the other hand, do not change their behavior in the aftermath of the crisis which can be explained by an implicit “too-big-to-fail'' protection at work.