Interest Rate Adjustment Research Articles

Fair hop-by-hop interest rate control to mitigate congestion in named data networks

Data retrieval in Named Data Networking (NDN) is based on content names irrespective of their hosting location. The NDN architecture introduces original naming, forwarding and caching techniques to improve data delivery efficiency. These distinctive techniques make the TCP congestion control scheme not suitable for the NDN architecture. In particular, the in-network caching and the multi-path forwarding used in the NDN architecture lead to fluctuations in the Round Trip Time (RTT) measurements. This makes the Retransmission TimeOut (RTO) an unreliable congestion indicator. Thus, the congestion problem in Named Data Networks deserves to be reconsidered. In this paper, we present a new congestion control algorithm, called IRNA (Interest Rate Notification and Adjustment), to mitigate the congestion problem in Named Data Networks while maintaining per flow and per consumer fairness property. More specifically, IRNA is a hop-by-hop scheme where each router monitors the occupation level of its outgoing queues to detect in advance potential congestion events. When the queue size is above or below a preset threshold, the router sends explicit notifications to its downstream nodes to specify the appropriate interest rate. Hence, by cooperatively adjusting the Interest transmission rate of each node and for each flow, IRNA succeeded to provide a fair transmission. We evaluated the performance of our solution using ndnSIM simulations. We compared IRNA to state-of-the-art hop-by-hop congestion control solution and we proved that IRNA managed to provide a faster congestion reaction and to achieve per flow and per consumer throughput fairness while maintaining a good bandwidth usage.

WAS THE INTEREST RATE POLICY OF THE ECB TOO LOOSE? INSIGHT FROM A SIMPLE TAYLOR RULE

The interest setting of a central bank can be explained using a rule-based monetary policy. A rulebased monetary policy framework considers major economic variables to make a recommended interest rate. In an economy, the fluctuations in major economic variables are vital indicators that signal an action from the central bank. In this paper, we scrutinize the short-term interest rate setting of the European Central Bank (ECB) based on the observed economic conditions. We have based our analysis on a simple Taylor rule. The investigation includes evidence and implication from a selected time period to reflect on the interest rate setting practice followed. For comparison purposes, the applicability and validity of a rule-based monetary policy are then analyzed for the US relying on the interest rate setting of the Federal Reserve. Our empirical findings confirm that the interest rate adjustments in the two central banks go along with the recommendations from a simple Taylor rule. Finally, taking the difference between the interest rate settings of the two banks, an empirical analysis is made to identify whether this difference can be attributed to the difference in simple Taylor rule recommendations.

Downward Interest Rate Rigidity

Empirical evidence suggests that bank lending rates are downward rigid: banks tend to adjust their rates more slowly and less completely to short-term market rates decreases than to increases. We investigate the macroeconomic consequences of this downward interest rate rigidity by introducing asymmetric bank lending rate adjustment costs in a macrofinance dynamic stochastic general equilibrium model. Calibrating the model to the euro area economy, we find that the difference in the initial response of GDP to positive and negative economic shocks of similar amplitude can reach up to 25%. This means that a central bank would have to cut its policy rate much more to obtain a symmetric medium-run impact on GDP. We also show that downward interest rate rigidity is stronger when policy rates are stuck at their effective lower bound, further disrupting monetary policy transmission. These findings imply that neglecting asymmetry in retail interest rate adjustments may yield misguided monetary policy decisions.

The Role of Financial Structural Factors in Retail Rate Adjustment: Evidence From Sri Lanka

This paper examines the interest rate channel of monetary policy transmission. It assesses the impact of banking structural factors on commercial bank pricing decisions and their pass-through in Sri Lanka. The empirical analysis uses aggregate monthly interest rates data from January 2008 to December 2018, a total of 132 observations. The findings suggest that the interest rate pass-through is significant overall, but incomplete. The credit quality, operational efficiency and excess liquidity play essential roles in explaining the adjustments of the bank lending and deposit rates. Non-performing loans increase the lending rate, and this result is robust to different combinations of the control variables. This suggests that banks with higher proportions of non-performing loans attempt to pass their credit losses on to customers. Further, bank inefficiency is passed on to customers in the form of lower deposit rates and excess liquidity in the banking system, both of which have a negative effect on the interest rate adjustments of both lending and deposit rates. A puzzling negative relationship is observed between the lending rate and operational inefficiency. The findings of this paper support the claim that banks in Sri Lanka take into consideration their structural factors as well as the monetary policy rates when setting the lending and deposit rates.

Exchange rate fluctuations and interest rate policy

AbstractThis research studies the non‐linear relationship between interest rates and exchange rates for China and the United States using the rolling‐window method. We also investigate uncovered interest rate parity (UIP) and the capital market theory for the whole time period and subperiods so as to reconsider various economic connections between China and the United States. The results suggest that the effect of the latter's interest rate adjustment on China/U.S. exchange rate volatility is stronger than that of China's interest rate adjustment. Moreover, changes in the China/U.S. exchange rate have a slightly stronger effect on the U.S. interest rate than on China's interest rate. Our findings reveal that the interest rate parity theory does not hold for the entire sample period but may hold in subperiods. The results provide a reference for the steady implementation of RMB internationalization.

Monetary Policy and Global Banking

ABSTRACTWhen central banks adjust interest rates, the opportunity cost of lending in local currency changes, but—absent frictions—there is no spillover effect to lending in other currencies. However, when equity capital is limited, global banks must benchmark domestic and foreign lending opportunities. We show that, in equilibrium, the marginal return on foreign lending is affected by the interest rate differential, with lower domestic rates leading to an increase in local lending, at the expense of a reduction in foreign lending. We test our prediction in the context of changes in interest rates in six major currency areas.

Pricking asset market bubbles

We propose an asset-pricing model in which investors switch between extrapolative and regressive expectation rules subject to an evolutionary fitness measure and show that central banks may tame endogenous expectations-driven boom-bust cycles by adjusting interest rates with a view to the market’s momentum.

Are QE and Conventional Monetary Policy Substitutable?

Yes! We study the substitutability between conventional monetary policy based on the adjustment of a short term policy interest rate with quantitative easing (QE). We do so in a four equation New Keynesian model featuring financial frictions that allows QE to be economically relevant. We analytically derive how much QE vs conventional policy is necessary to implement an inflation target. Quantitatively, the observed expansion of the Federal Reserve’s balance sheet over the zero lower bound (ZLB) period provides stimulus equivalent to cutting the policy rate to two percentage points below zero. This is in-line with the decline in the empirical shadow Federal Funds rate series. Moreover, we show that the amount of QE required to achieve price stability depends on the expected duration of the ZLB.

High Water, No Marks? Biased Lending after Extreme Weather

Policymakers have put forward proposals to ensure that banks do not underestimate long-term risks from climate change. To examine how lenders account for extreme weather, we compare matched repeat mortgage and property transactions around a severe flood event in England in 2013–14. First, lender valuations do not ‘mark-to-market’ against local price declines. As a result valuations are biased upwards. Second, lenders do not offset this valuation bias by adjusting interest rates or loan amounts. Third, borrowers with low credit risk self-select into high flood risk areas. Overall, these results suggest that lenders do not track closely the impact of extreme weather ex‑post, and that public flood insurance programs may subsidise high income households.

Monetary Policy under Data Uncertainty: Interest-Rate Smoothing from a Cross-Country Perspective

Cross-country estimates of Taylor rules suggest that higher data uncertainty is associated with a more inertial behavior of interest rates. Data uncertainty is measured by the volatility of differences between real-time data and their revisions. Using a simple structural model with Kalman filter learning, I replicate the cross-country pattern of the inertial behavior. More inertial behavior results not because central banks gradually adjust interest rates in the face of data uncertainty, but because the central banks' inference about the true data is correlated with past interest rates. Thus, I endogenize the inertial behavior of interest rates as resulting in part from the learning process.

Monetary policy and financial stability in emerging market economies

Abstract During the 1990s and early 2000s, the consensus was that central banks had to adjust interest rates only in response to inflation and (possibly) output. Such consensus was questioned in the aftermath of the Global Financial Crisis, as well as during the present pandemic. In contrast with most of the traditional literature, some observers argued that financial crises are endogenous events, claiming that central banks also had to dampen the accumulation of financial imbalances; that is, they had to “lean against the wind.” However, this debate has, for the most part, focused on advanced economies (AEs), overlooking important characteristics of emerging market economies (EMEs). Based on more recent literature, in this paper, we set the terms of the debate for EMEs. We argue that the relationship between monetary policy and financial stability is different in these economies because, unlike in AEs, the financial conditions are strongly dependent on capital flows. This characteristic of EMEs makes the trade-offs faced by their central banks more complex.

Economic Analysis of the Forest Promotion, Forest-Saving Program, Installed in the Southern Half of Rio Grande do Sul State, Brazil

This study aimed to analyze economically the forest promotion, forest-saving program installed in the southern half of Rio do Grande do Sul State, Brazil, as an income alternative and potential supplier of raw material in the forest production segment. Cost data were calculated for the total of 269 projects per hectare and divided into Inputs and Services. The revenues were derived from the sale of standing timber at the end of the forest production cycle, not including harvesting costs. For economic analysis, criteria from Net Present Value (NPV), Benefit Cost Ratio (B/C), Internal Rate of Return (IRR), and Equivalent Annual Value (EAV) were used. The interest rate used was 7.0% per year according to the promotion program. The project presents at seven years a NPV of $542.90 and an IRR of 16.0%, showing to be feasible and attractive. The costs and revenues from the year seven planting were analyzed and with addenda at years 8, 9, and 10, demonstrated that greater project profitability gains are achieved between years 8 and 9 with an increase of $463.18 in relation to year 8. This represents a profitability of 49.0% which had an increase of $229.61 when compared to year 7. The sensitivity analysis demonstrated the inverse relationship trend that exists between the NPV and the interest rate.
 
 The project’s return capacity from the seventh year is precisely referenced by the freezing of the debt, which did not accrue an interest rate adjustment, as well as the price per cubic meter of timber, which remains readjusting as zero bases.

Aging, Output Per Capita, and Secular Stagnation

This paper re-examines the relationship between population aging and economic growth. We confirm previous research such as Cutler et al. (1990) and Acemoglu and Restrepo (2017) that show positive correlation between population aging and per capita output growth. Our contribution is demonstrating that this relationship breaks down when the adjustment of interest rates is inhibited by a lower bound on nominal rates, as during the Great Financial Crisis decade. Indeed, during the “secular stagnation regime” of 2008–2015 that prevailed in a number of countries, aging had a negative impact on living standards, consistent with the secular stagnation hypothesis. (JEL E23, E32, E43, G01, I31, J14)

Converting remittances to investment: a dynamic optimal policy

The existing literature does not provide a theoretical framework for conversion of remittances into investment. If a government introduces some measure for the earner abroad to save more, the earner’s cost (to the extent of his/ her share of savings in the home country) jumps to the pre-policy cost minus the additional costs causing inefficiency prior to the remittance policy affecting the quantity of savings and hence pushing the market out of equilibrium. The supply and the demand of the savings, then adjust over time to bring the new post-policy market equilibrium. The interest rate adjustment mechanism is based on the fact that when the remittance-investment policy leads the market out of equilibrium, the buyers’ and sellers’ decisions are not coordinated at the current interest rate. It is essential to take into account the efficiency losses during the adjustment process while computing the benefits of remittance-investment policy. This paper develops a dynamic model and derives an optimal remittance-investment policy minimizing the efficiency losses (output and/ or consumption of funds lost) during the dynamic adjustment process taking into account the gains from the post-policy market equilibrium subject to a policy cost constraint.

Legal aspects of changes in the calculation of the marisa national saving banks of marisa branch interest calculation methods

Banks as legal entities must also pursue profits. And one source of bank income is the interest on loan loans that have been channeled to customers. And if the bank's revenue target is threatened because the value of the rupiah weakens or floats, the bank is basically allowed to raise lending rates as long as it does not exceed the limit set by the government in this case the Financial Services Authority ... But the facts that occur in this case are not in context changes or adjustments in loan interest rates with rupiah value. But the change in the method of calculating credit interest rates from the type of effective calculation becomes an annuity calculation. So that changes in the method of calculating interest rates should not be done without an agreement from both parties.The Marisa Branch National Pension Savings Bank has carried out defaults since the first credit agreement, changes to the second credit agreement, and arrived at a change in the third credit agreement for changes in interest rates. Thus, of course this has legal consequences that must be borne by the party who defaults, in this case the National Pension Savings Bank. Then the actions of the bank are included in the category of actions that cause losses to debtors due to default of creditors (BTPN), so that the legal consequences can be by canceling the agreement along with guri change or by fulfilling the agreement accompanied by compensation.

Shocks of Supply and Demand，Idiosyncratic Expectations and the Choice of Monetary Policy Paradigms

Since the 2008 international financial crisis, many countries have returned to the discretionary paradigm in macroeconomic regulation. China’s 2017 Government Work Report also stressed to strengthen discretionary regulation of monetary policies for the first time. But up to now, scholars have not reached a consensus about which one is better between discretionary and ex-ante commitment paradigms. Most of the researches support the viewpoint that playing by the rule can improve the credibility of monetary policies with containing ex-ante commitment mechanism. However, the flexibility and pertinence of discretionary regulation undoubtedly play an important role in making the economy out of recession. So this paper aims to quantitatively analyze the economic stabilization effects of discretionary and ex-ante commitment paradigms by a new Keynesian model. Most of the literature uses the new Keynesian framework to make an analysis based on the rational expectation hypothesis. But in China, people have obviously idiosyncratic expectations and the rational degree of expectations needs to improve. So the monetary policy analysis based on the rational expectation hypothesis is not applicable to current reality. The 2016 Central Economic Working Conference firstly put forward maintaining prudential and neutral monetary policies”, but most of the monetary policy literature omits the impact of interest rate adjustment, so that the conclusions couldn’t adapt to the value orientation of current monetary policies. To accurately understand the efficiency of discretionary paradigms in the current Chinese context, this paper builds a new Keynesian model including idiosyncratic expectations and induces the formulas for discretionary and ex-ante commitment paradigms based on the triple-target loss welfare function with interest rate stabilization by the central bank. It shows that: （1） The demand shock mainly derives Chinese economic fluctuations, idiosyncratic expectations consist of rational ingredient and adaptive ingredient, and monetary policies incline to discretion. （2） The demand shock leads to a more sluggish economic fluctuation convergence than the supply shock, improving the rational degree of expectations helps to promote the whole welfare, and ex-ante commitment is not necessarily better than discretion, specifically when idiosyncratic expectations exists. （3） Monetary policies without interest rate stabilization operation result in a greater welfare loss, and the loss is greater under the demand shock than under the supply shock. It suggests that: （1） Discretion is reasonable under idiosyncratic expectations, and monetary policies shouldn’t be blindly transformed into the ex-ante commitment paradigm. （2） Monetary policies must be focused on interest rate stabilization under the condition of economic fluctuations mainly driven by the demand shock, and prudential and neutral monetary policies can prevent unnecessary interest disturbance from affecting financial stability, so as to promote large reduction in the welfare loss. （3） In the long run, improving public expectations, gradually getting rid of external dependence and vigorously pushing the supply-side structural reform can improve the stabilization effects of monetary policy regulation.

On Calibration and Simulation of Local Volatility Model with Stochastic Interest Rate

Local volatility model is a relatively simple way to capture volatility skew/smile. In spite of its drawbacks, it remains popular among practitioners for derivative pricing and hedging. For long-dated options or interest rate/equity hybrid products, in order to take into account the effect of stochastic interest rate on equity price volatility stochastic interest rate is often modelled together with stochastic equity price. Similar to local volatility model with deterministic interest rate, a forward Dupire PDE can be derived using Arrow-Debreu price method, which can then be shown to be equivalent to adding an additional correction term on top of Dupire forward PDE with deterministic interest rate. Calibrating a local volatility model by the forward Dupire PDE approach with adaptively mixed grids ensures both calibration accuracy and efficiency. Based on Malliavin calculus an accurate analytic approximation is also derived for the correction term incorporating impacts from both interest rate volatility and correlation, which integrates along a more likely straight line path for better accuracy. Eventually, the hybrid local volatility model can be calibrated in a two-step process, namely, calibrate local volatility model with deterministic interest rate and add adjustment for stochastic interest rate. Due to the lack of analytic solution and path-dependency nature of some products, Monte Carlo is a simple but flexible pricing method. In order to improve its convergence, we develop a scheme to combine merits of different simulation schemes and show its effectiveness.

Frictions in transmission of interest rate cuts from central bank to commercial banks in India. An enquiry

This paper is an attempt to understand the interest rate adjustments made by the Indian commercial banks in accordance with central bank adjustments. The process followed is that of building a reaction function with respect to base rate of a bank. The findings of the study show that focusing on the base rate fixation by State Bank of India in different quarters, the base rate in the immediate past quarter, the current as well as the net interest income of the past few quarters and provisioning for loan losses in the current quarter plays a significant role in their decisions on base rate adjustments. The implications of the findings of the present study for policy makers is significant as the good health of the banking sector with minimal amount of nonperforming assets will impart the much needed flow to monetary transmission in India.

The Arguments for a Permanent Zero Interest Rate.

A zero interest rate regime is one where government issues a form of money which pays no interest, but does not borrow. There are three reasons for that policy. First , most if not all the reasons given for government borrowing are hopeless. Second , adjusting interest rates is a policy which is riddled for anomalies. E.g. in order to be able to cut interest rates, government first has to artificially raise them. But artificial adjustments to the price of anything, including the price of borrowed money does not make economic sense. Third , the market failure which causes recessions is not the failure of interest rates to fall. It’s the failure of wages and prices to fall, which would increase the real value of base money and government debt (if there is any), which in turn would encourage spending. That’s the “Pigou effect”. If government and central bank were simply to create new base money and spend it (and/or cut taxes) in a recession, that would come to much the same as the Pigou effect. That is what might be called a “free market compliant” policy. Interest rate adjustments are not “compliant”. Thus government should not borrow other than for very good reasons, if there are any, and artificial adjustments to interest rates should cease, except perhaps in emergencies. That, for want of a better phrase, can be described as a “permanent zero interest rate” policy. That policy is not far from the UK Labour Party’s new fiscal rule.

The efficacy of macroeconomic policies in resolving financial market disequilibria: A cross‐country analysis

AbstractThis study attempts to evaluate the efficacy of macroeconomic policies in resolving financial market disequilibria and to elucidate the influence of the political landscape and global financial integration on the policymaking process. The current investigation examines three macroeconomic policies: (a) government spending, (b) liquidity provision, and (c) central bank interest rates by analysing 21 countries around the globe. The results suggest that government spending is a suboptimal macroeconomic policy for mitigating imbalances in financial markets, as it may have destabilizing effects. Liquidity provision was found to be ineffective in facilitating financial market stability whereas the adjustment of interest rates was found to be a viable tool for mitigating financial market imbalances. Therefore, an appropriate policy framework would comprise the following: prudent government spending, conditional liquidity provision, and a reduction in interest rates following the development of financial market disequilibria. Furthermore, this study found strong evidence against the notion that political orientations influence policy frameworks, which were designed to redress financial market disequilibria. This study also found that global financial integration does not influence the policymaking process.