Interest Rate Hikes Research Articles

The ECB's Solution to the Inflation Caused by the Russia-Ukraine Conflict

Abstract: The Russian-Ukrainian War saw a major escalation on February 24, 2022, when Russia invaded Ukraine, sparking the biggest battle in Europe since World War II. In addition to negatively affecting international relations, this lengthy conflict has had a significant negative influence on world markets, especially those in the Eurozone. The ongoing conflict has intensified inflationary pressures, necessitating the implementation of strong fiscal and monetary measures by the European Central Bank (ECB). This study analyzes the inflationary effect of the Russia-Ukraine crisis on the economies of the Eurozone and assesses the ECB's policies using macroeconomic models, such as the IS-PC-MR model. It explores the complex economic fallout, which includes unstable energy supply, higher industrial prices, and a decline in consumer confidence. The economy has stabilized largely because of the ECB's initiatives, which have included coordinated fiscal policies, interest rate hikes and asset purchase adjustments. Despite these initiatives, problems still exist, such as controlling the growing public debt and striking a balance between inflation management and economic growth. In order to strengthen economic resilience, the conclusion highlights the need for ongoing adaptation and international cooperation. Investments in integrated fiscal measures, diverse supply chains, and renewable energy are suggested as being crucial for long-term stability. The purpose of this study is to provide insights for future economic crisis management and to contribute to policy-making conversations.

Structured factor copulas for modeling the systemic risk of European and United States banks

In this paper, we employ Credit Default Swaps (CDS) to model the joint and conditional distress probabilities of banks in Europe and the U.S. using factor copulas. We propose multi-factor, structured factor, and factor-vine models where the banks in the sample are clustered according to their geographic location. We find that within each region, the co-dependence between banks is best described using both, systematic and idiosyncratic, financial contagion channels. However, if we consider the banking system as a whole, then the systematic contagion channel prevails, meaning that the distress probabilities are driven by a latent global factor and region-specific factors. In all cases, the co-dependence structure of bank CDS spreads is highly correlated in the tail. The out-of-sample forecasts of several measures of systemic risk allow us to identify the periods of distress in the banking sector over the recent years including the COVID-19 pandemic, the interest rate hikes in 2022, and the banking crisis in 2023.

Impact of the Fed's Rate Hike Policy on the Prices of Commodities and Real Estate

The United States has experienced a long period of stubborn inflation since 2022, so the Federal Reserve began to raise interest rates in March 2022, which will cause asset price volatility and valuation changes. The purpose of this study is to explore the changes of some commodity and real estate prices under this background, and to put forward reasonable valuation forecast suggestions. This research mainly analyzes the price changes of crude oil, corn, and real estate under the background of the Fed's interest rate hike and analyzes the changes of asset prices by constructing the structure vector autoregressive (SVAR) model and the grid connectivity model. According to the analysis, the results show that the Fed can influence real asset prices through its monetary policy, and other factors inevitably interfere. The empirical data from March 2022 to March 2024 also show that with the Fed's multiple interest rate hikes, asset prices are affected by different degrees of decline.

Decoding the Yield Curve: Understanding its Significance in Economic Forecasting

Throughout history, the Romanian yield curve has assumed various shapes that correspond to differing economic conditions, representing market sentiment and anticipation of future economic activity and interest rates. In times of economic stability and growth, the yield curve has generally exhibited an upward slope, signifying investor trust in continued economic expansion and expectations of future interest rate hikes. In contrast, during periods of economic uncertainty or downturns, the yield curve has often flattened or turned negative. A flattening curve suggests uncertainty about future economic conditions, while an inverted curve, where short-term yields surpass long-term yields, indicates significant economic stress and has traditionally been an accurate predictor of forthcoming recessions. These fluctuations offer essential insights for policymakers and investors, helping in the understanding and anticipation of economic trends and in the effective management of financial risks.

The Impact of the Latest Federal Reserve Interest Rate Hike on the Chinese Economy

This study utilizes weekly data from March 2022 to September 2023, employing the TVP-VAR model to empirically analyze the impact of the Federal Reserve's interest rate hikes on the Chinese economy. The results indicate that the Federal Reserve's rate hikes have exerted negative shocks on China's output, with the effects dissipating after 8 to 12 lags. China's monetary policy has shown a short-term inverse relationship with that of the United States, though the overall impact remains minimal. The rate hikes have suppressed China's fixed asset investments, with a gradually diminishing impact on GDP. Additionally, the rate hikes have negatively affected the RMB exchange rate and China's exports, with the rising USD/RMB exchange rate further restraining exports. The widening interest rate differential between the USD and RMB has impacted China's stock market, making international capital more inclined to invest in U.S. enterprises. To address these challenges, this paper recommends that China continue to implement a prudent monetary policy, advance RMB internationalization and exchange rate marketization reforms, enhance market liquidity, and improve the stock market and institutional frameworks to bolster economic stability and resilience. The findings provide theoretical foundations and feasible strategies for sustaining China's economic growth and mitigating external shocks.

Exploration of the Reasons for the Federal Reserve’s Interest Rate Hike in 2022 and Evaluation of Policy Effectiveness

After the global economy experienced the impact of the new crown epidemic, the US economy recovered in 2022, but inflation rose rapidly, prompting the Federal Reserve (FED) to take interest rate hikes. This paper analyzes the background and reasons for the Fed’s interest rate hike in 2022, and evaluates its policy effect, aiming to provide experience and lessons for future monetary policymaking. The main findings include: that the interest rate hike significantly reduced the inflation rate in the United States, from 8.0% in the first quarter to 5.67% in the fourth quarter; In the short term, interest rate hikes will hinder the economy, but in the long term, they will help promote stable growth; The interest rate hike led to stock market fluctuations and bond market yields rising, the credit market tightening, and increased the instability of the global financial market; Urge other countries to adjust their monetary policies and increase global economic uncertainty. The significance of this paper is to expand the theory of international financial and monetary policy and provide comparative research value for the policy-making of emerging market countries and developing countries. The policy recommendations include: the United States should strengthen policy transparency and financial supervision to promote the optimization of economic structure; Other countries should strengthen macro policy coordination, improve financial regulatory capacity, achieve economic diversification, maintain monetary policy flexibility, and promote the healthy development of cross-border capital flows.

The Impact of the Federal Reserve’s Interest Rate Hikes on U.S. Inflation Rate

The Federal Reserve’s interest rate hikes have a significant impact on domestic economic activities and monetary policies in the United States. Since March 2022, the Federal Reserve has raised interest rates multiple times to counter domestic inflationary pressures. In this article, data on the U.S. inflation rate and the federal benchmark interest rate from January 2010 to March 2024 were extracted, and an ARIMA model was used for analysis to predict how the U.S. inflation rate will develop under the condition of interest rate hikes. The study found that after the Federal Reserve raised interest rates, the inflation rate in the United States also rose. The reasons for this situation may be due to increased inflation expectations and external factors such as COVID-19. To mitigate risks brought by the rise in inflation, such as asset devaluation, commodity price volatility, and reduced investment returns, investors can adopt strategies like diversifying their investments, closely monitoring the Federal Reserve’s interest rate hikes, and avoiding high-leverage investments.

The Impact of Geopolitical Conflict and Fed Rate Hikes on Asset Pricing

In the current context of weak economic recovery, ongoing Russia-Ukraine conflict, and consecutive interest rate hikes by the Federal Reserve, global financial and commodity markets have experienced intensified turbulence. To investigate the impact of the Russia-Ukraine conflict and the Federal Reserve interest rate hikes on asset pricing, this study first analyzed the U.S. stock market, bond market, and commodity market based on data from the CEIC database. From the comprehensive stock and year-on-year data after each round of interest rate hikes, it is evident that both the Russia-Ukraine conflict and the Federal Reserve interest rate hikes have had a significant negative impact on investors' financial assets. Additionally, due to the continuous interest rate hikes by the Federal Reserve, funds from the stock market have gradually shifted to the bond market. Furthermore, after analyzing the impact of the Russia-Ukraine conflict and the Federal Reserve interest rate hikes on the U.S. stock market, bond market, and commodity market, the study further explored the influence of these factors on asset pricing using the discounted cash flow (DCF) valuation model. Finally, the study provided an outlook on future market trends.

Economic Consequences of the Federal Reserve’s Interest Rate Hike: The Financial Market and Labor Market

Economic Consequences of the Federal Reserve’s Interest Rate Hike: The Financial Market and Labor Market

Risk Assessment of Banks When Interest Rate Hikes

Interest rates play a crucial role in the risk management of banks. When central banks raise interest rates to curb inflation or an overheated economy, the risk profile of banks can alter significantly. This paper explores the risks banks face and their assessment methods in a rising interest rate environment, focusing on SVB and Credit Suisse as case studies. It identifies key risks such as liquidity risk, credit risk, market risk, and systemic risk by examining the impact of increasing interest rates on banks' balance sheets, earnings, and capital positions. The research concludes that Asset-Liability Management (ALM) modeling, stress testing, and hedging strategies are effective tools for banks to manage these risks. A thorough literature review underscores the importance of these strategies in ensuring banks' stability and performance amidst rising interest rates. The paper highlights that proper risk management practices are essential for banks to navigate the challenges posed by changing interest rates and to maintain their financial health and operational stability in such an environment.

Lessons from the Collapse of Silicon Valley Bank

The Federal Reserve's consecutive interest rate hikes led to a decline in the prices of US Treasuries and mortgage-backed securities (MBS), which comprised a significant portion of Silicon Valley Bank (SVB)'s asset portfolio. As a result, SVB experienced substantial floating losses, exceeding its owner's equity, creating immense pressure on its assets and liabilities. The analysis also highlights the simple deposit and asset structures of SVB, with a high proportion of demand deposits and a significant allocation to bonds. The aggressive interest rate hikes by the Federal Reserve, coupled with financing difficulties for startups, accelerated deposit consumption and intensified debt pressure for SVB. Furthermore, the article reveals the low coverage rate of deposit insurance, particularly at SVB, where only 7% of deposits are insured. This adds to the vulnerability of SVB and its depositors. In conclusion, this article examines SVB's balance sheet and interest rate risk exposure, identifies shortcomings in the management supervision system, and provides three reflections on the financial event.

Risk Assessment of Banks and Financial Institutions When Interest Rate Hikes

This article delves into the multifaceted risks precipitated by a bank's decision to increase interest rates. It commences with an overarching overview contextualized within The Times, elucidating the significance of the subject matter. Subsequently, it delineates various extant risks, each accompanied by a succinct exposition and an outline of corresponding mitigation strategies. Following this introductory phase, the article conducts a meticulous analysis of these identified risks, methodically dissecting liquidity risk, reputation risk, market risk, and systemic risk. Each risk is meticulously defined, substantiated with historical precedents, and elucidated with comprehensive management methodologies. This paper underscores the myriad risks attendant to a bank's interest rate hike. This synthesis serves to underscore the overarching theme that such policy decisions not only reverberate through the financial ecosystem but also necessitate vigilant risk management protocols to safeguard against potential ramifications. Finally, the article concludes by summarizing the numerous risks posed by a bank's interest rate hike. It emphasizes the need for careful consideration and proactive risk management to mitigate potential consequences.

China's monetary policy framework and global commodity prices

This paper examines the effects of China's monetary policy on global commodity prices over the quarterly period 1996:Q1–2021:Q4. Using a Bayesian Structural VAR model, we evaluate the impact of interest rate shocks (as a price rule) and shocks to the monetary aggregate (M2) (as a quantity rule) on those commodity prices. Our main findings are fourfold. First, a positive interest rate shock has a negative and persistent effect on commodity prices, with beverages and metals commodity prices falling the most in response to such shock. Second, a positive shock to the growth rate of M2 has a strong impact on the prices of non-fuel commodities, agricultural raw materials, and metals. Still, the highly volatile food and fuel (energy) commodity prices are less affected. Third, while both the growth rate of M2 and the interest rate seem relevant macroeconomic stabilizers, the quantity instrument appears more effective than the price instrument in explaining commodity prices. Finally, while interest rate hikes are linked with a persistent rise in world uncertainty, monetary expansions lead to a long-lived fall in this variable. All in all, our study provides new evidence about the impact of China's monetary policy on global commodity prices using a rich dataset and an econometric setup that accounts for uncertainty.

Blowing against the Wind? a narrative approach to central Bank foreign exchange intervention

Most countries in the world use foreign exchange intervention, but measuring the success of the policy is difficult. By using a narrative approach, I identify interventions when the central bank manages to influence the exchange rate based on pure luck. I separate them from interventions when the central bank actually impacted the exchange rate. Because intervention records are daily aggregates, an intervention might appear to have changed the direction of the exchange rate, when it is more likely to have been caused by market news. This analysis allows to have a better understanding of how successful central bank operations really are. I use new daily data on Bank of England interventions in the 1980 s and 1990 s. Some studies find that interventions work in up to 80 % of cases. Yet, by accounting for intraday market moving news, I find in adverse conditions, the Bank of England managed to influence the exchange rate only in 8 % of cases. I use natural language processing to confirm the validity of the narrative approach. Using lasso and a VAR analysis, I investigate what makes the Bank of England intervene. I find that only movement on the Deutschmark and not US dollar exchange rate made the Bank intervene. Also, I find that interest rate hikes were mostly a tool for currency management and accompanied by large reserve sales.

Monetary Policy and Stock Market Return: The Case of Saudi Arabia Interest Rates hikes and Stocks Returns

The purpose of this research is to examine whether changes in macroeconomic variables have an effect on Saudi Arabia's main index, TASI and whether Monetary policy actions produce positive, negative or no effect at all for all listed companies. Accordingly, we examine the stock price adjustment around announcements of changes in interest rates, we examine the impact of a series of interest rate hikes on the stock returns under the main stock index in the Saudi Stock Market, TASI. The data covers four events between 16 March 2021 to 5 October 2022. We use an event study approach, with an estimation window length of [-250,-11] and an event window length of [-10,7], and we apply the OLS market model for daily data. The significance of the cumulative abnormal return CAAR is tested using the t statistics. The empirical results show that TASI responds negatively to three out of four announcements of interest rate hikes. The positive reaction occurs during the July 2022 monetary action. The positive reaction is attributed to the rising oil prices during that period. Finally, the results of this research open a window for future research to examine the impact of interest rates on the Saudi stock market over the long run.

Post-COVID inflation and the monetary policy dilemma: an agent-based scenario analysis

AbstractThe economic shocks that followed the COVID-19 pandemic have brought to light the difficulty, both for academics and policy makers, of describing and predicting the dynamics of inflation. This paper offers an alternative modelling approach. We study the 2020–2023 period within the well-studied Mark-0 Agent-Based Model, in which economic agents act and react according to plausible behavioural rules. We include a mechanism through which trust of economic agents in the Central Bank can de-anchor. We investigate the influence of regulatory policies on inflationary dynamics resulting from three exogenous shocks, calibrated on those that followed the COVID-19 pandemic: a production/consumption shock due to COVID-related lockdowns, a supply chain shock, and an energy price shock exacerbated by the Russian invasion of Ukraine. By exploring the impact of these shocks under different assumptions about monetary policy efficacy and transmission channels, we review various explanations for the resurgence of inflation in the USA, including demand-pull, cost-push, and profit-driven factors. Our main results are fourfold: (i) without appropriate fiscal policy, the shocked economy can take years to recover, or even tip over into a deep recession; (ii) the success of monetary policy in curbing inflation is primarily due to expectation anchoring, rather than to the direct economic impact of interest rate hikes; (iii) however, perhaps paradoxically, strong inflation anchoring is detrimental to consumption and unemployment, leading to a narrow window of “optimal” policy responses due to the trade-off between inflation and unemployment; (iv) the two most sensitive model parameters are those describing wage and price indexation. The results of our study have implications for Central Bank decision-making, and offer an easy-to-use tool that may help anticipate the consequences of different monetary and fiscal policies.

Heterogeneous regional effects of monetary policy: Evidence from Korea

Using regional panel data from Korea, this paper investigates the differential impact of monetary policy on output, consumption, and employment by region. Depending upon distinctive regional characteristics, the effects of monetary policy are heterogeneous across regions. Specifically, regions with a lower share of manufacturing, a lower income level, a higher proportion of the elderly population, and a higher household debt ratio exhibit more pronounced responses in output, consumption, and employment to monetary policy shocks. Further, we show that the share of net exports, the share of small businesses, and the share of non-wage workers are pivotal factors that drive the primary results. These findings imply that vulnerable regions may experience a stronger impact from recent rapid interest rate hikes, underscoring the importance of supplementary fiscal support for the regions.

Shocks to inflation expectations

The consensus among central bankers is that higher inflation expectations can drive up actual inflation. We assess this by devising a novel method for identifying shocks to inflation expectations, estimating a semi-structural VAR where an expectation shock is identified as that which causes measured forecasts to diverge from the rational expectation. Surprisingly, using data for the United States we find that a positive inflation expectation shock is contractionary and deflationary: output, inflation, and interest rates all fall. These results are inconsistent with the standard New Keynesian model, which predicts inflation and interest rate hikes.

The Collapse of Silicon Valley Banks Improves Risk Management for Other Commercial Banks

Silicon Valley Bank, a subsidiary of Silicon Valley Bank Financial Group, provides loans to venture capital as well as startups. Silicon Valley Bank primarily serves technology-based companies. Our paper focuses on the implications of the Silicon Valley bank bankruptcy for other commercial banks from four aspects. First, what are the risks in the business operation model of Silicon Valley banks; second, what caused the bankruptcy of Silicon Valley Bank; Third, the impact of the bankruptcy of Silicon Valley Bank; Fourth, the bankruptcy of Silicon Valley Bank has implications for the development of Chinese commercial banks. The main reason for the bankruptcy of Silicon Valley Bank was the Fed's interest rate hike. As a traditional commercial bank, Silicon Valley Bank's profit model is mainly based on interest differential. Affected by the epidemic, the demand for loans from Silicon Valley banks declined, so Silicon Valley banks chose to buy US Treasury bonds and MSBs. The Fed's interest rate hike coupled with a large amount of money printing in the United States has led to inflation. The sharp depreciation of US Treasuries and MSBs, coupled with the end of the mobile Internet cycle, forced Silicon Valley banks to sell a large number of unmatured bonds. Eventually a bank run occurred, leading to the bankruptcy of Silicon Valley Bank.

Silicon Valley Bank Collapse: Causes & Consequences

This paper discusses the concept of bank bankruptcy and highlights the recent failure of Silicon Valley Bank (SVB) as a significant case similar to the Lehman Brothers' collapse in 2008. Lehman's failure was attributed to the U.S. housing market collapse and internal risk management issues. SVB's failure, occurring in 2023, resulted from both internal factors (improper decisions, high-risk strategies, and poor financial management) and external factors (economic recession, Federal Reserve interest rate hikes, regulatory challenges, and changes in the tech industry). The bankruptcy of SVB has far-reaching economic impacts on depositors, borrowers, entrepreneurs, investors, and the banking industry. It triggers a crisis of confidence, liquidity pressure, and systemic risks. The Federal Reserve implements emergency measures to address the fallout, reflecting on regulatory approaches to mitigate threats to the banking system. The comparison with Lehman Brothers underscores similarities in improper development strategies, asset structures, risk management, and regulatory oversight, leading to systemic risks and undermining financial market confidence.