Interest Rate Shocks Research Articles

The Impact of Fed’s Monetary Policy on the Capital Market in the USA

The focus of this paper is the impact of the Federal Reserve (Fed) System’s monetary policy on the United States capital market. To identify the capital market, we have segmented it into the government bond market, the corporate bond market, and the stock market. We have utilized a structural vector autoregressive model methodology in order to assess the interrelations between six US variables. We have performed impulse response functions and forecast error variance decomposition analyses for the model interpretation. The empirical findings based on monthly data suggest that the results, in general, are consistent with the expected effects, despite some deviations. The responses of the government, corporate bond markets and the stock market in the United States to the Fed’s monetary policy interest rate shocks have developed mainly in the short run and gradually faded away in the long run. There are significant interdependencies between the observed variables, though each of them is affected to its own specific extent.

Optimal monetary policy under currency mismatches in imperfect financial market

There is a large body of evidence documenting that many emerging market economies are subject to external financial shocks. We propose a two-country Dynamic General Equilibrium Model(DSGE) with three market imperfections: currency mismatches, moral hazard in banking and dominant currency pricing. Building upon Aoki, Benigno and Kiyotaki (2020) and Akinci, Queralto (2020), we analyze the optimal monetary policy in response to foreign interest rate shocks under the presence of the frictions. The results show that foreign monetary policy tightening leads to sharper local currency depreciation when import and export prices are set in the dominant currency compared to producer currency pricing. The optimal policy response to the foreign interest rate hike is a foreign exchange (FX) intervention with relatively strict inflation targeting. Macroprudential measures offer a modest macroeconomic and financial stabilization effect. We also conclude that domestically-produced goods inflation targeting alone is the worst monetary approach in EMs that attribute several real economy and financial imperfections. Nevertheless, allowing for integration of different monetary tools as well as introduction of FX hedging would be an interesting extension of our analysis.

A Time-Varying Connectedness Analysis of the Korean Economy

We examine time-varying connectedness among Korea’s macroeconomic variables with a special focus on whether there are structural changes among macro variables between beforeand after-Covid19 periods. From total connectedness analysis, we found that the connectedness among macro variables intensified after Covid-19. From “NET” connectedness analysis, we also found that employment shock affects other variables more than other shocks affect employment and that wage is affected by other shocks more than its shock affect other variables after Covid-19 pandemic. Net pairwise directional connectedness analysis reveals that the sign of net effect reversed between (1) total hours worked and employment, and (2) wage and employment after Covid-19. Finally, network graphs of net pairwise directed connectedness, based on the relative strength of connectedness, show that wage shock strongly affect production. CPI also affects the production while it is also affected by interest rate shock. Employment shock has significant effect on interest rate. We also provide the policy implications based on the connectedness analysis.

The Time-Varying Effect of Interest Rates on Housing Prices

This study analyzes the time-varying effect of interest rates on housing prices. As housing prices are too high for most consumers to afford with income alone, they use bank loans. Consequently, when interest rates fall, the demand for housing increases, causing prices to rise. This effect of interest rates was common in countries that implemented low-interest rates in response to the COVID-19 pandemic. Using Korean data from March 1991 to March 2022, this study examined the impact of interest rate shocks on housing prices by employing a time-varying parameter vector autoregressive model. According to the analysis, in Korea, while the impact of the interest rate shocks on housing prices was not significant before the global financial crisis, it increased dramatically afterward. Particularly, the impact of interest rate shocks was strongest relative to the past during the period of the increase in house prices from 2020 to 2021. The rise in the effects of interest rate shocks on housing prices is attributed to the increased dependence on loans for housing purchases. The results suggest that given the recent substantial increments in interest rates due to inflation, an interest rate shock would likely cause a global housing market recession.

CHANGE AND DEVELOPMENT IN THE PUBLIC DEBT STOCK STRUCTURE IN TURKEY: COVID-19 PANDEMIC PERIOD

Bu çalışmanın amacı, küresel boyutta ekonomik krize yol açan Covid-19 salgın döneminde Türkiye’nin kamu borç stok yapısını incelemektir. Çalışma, salgın döneminde kamu borç stok yapısındaki değişimi görebilmek ve salgın sonrası sürecin gelişimini değerlendirebilmek amacıyla 2018-2022 dönemini kapsamaktadır. Türkiye’de 2020 yılı Mart ayından itibaren kısa zamanda yayılan salgın aynı zamanda bir ekonomik krize dönüşmüştür. Bu kapsamda salgının hem toplumsal hem ekonomik etkilerini azaltmaya yönelik maliye politikası araçlarının etkin bir şekilde uygulanmasıyla, artan merkezi yönetim bütçe açığının finansmanı kamunun borçlanma ihtiyacını önemli ölçüde artırmıştır. Salgın ile birlikte bozulan mali disiplinin yanı sıra bozulan makroekonomik göstergeler, artan dolarizasyon sadece kamu borç stok büyüklüğünü artırmakla kalmamış aynı zamanda borç stok yapısında da ciddi bozulmalara yol açmıştır. Özellikle kamu borç stoku içinde TL cinsi değişken faizli ve döviz cinsi borçlanmanın payının artmakta olması Türk Lirasına (TL) olan güveni azaltmakta ve TL değer kaybetmektedir. Sonuçta, kamu borç stokunun faiz ve kur şoklarına karşı kırılganlığının ve maliyetinin artması etkin bir borç yönetim uygulanmasını engellemektedir.

Monetary policy transmission, productive activity, and inflation in Brazil: Does uncertainty matter?

This research paper aimed to assess the impact of uncertainties on the outcomes of monetary policy in Brazil after the adoption of inflation targeting. To this end, we adopted the methodology of vector autoregressions with an endogenous threshold (TVAR) and four distinct indicators to characterize regimes of high vs. low macroeconomic uncertainty. The analyzed sample varied from 2003 to 2021, with monthly data. Our results showed that uncertainty tended to increase during recessions in the country. Furthermore, in periods of higher instability, policy interest rate shocks exerted a lesser effect on aggregate production. However, the most significant influence of uncertainty occurred regarding inflation control, which was severely reduced when compared to more tranquil periods. Therefore, we concluded that uncertainty can harm monetary policy transmission in Brazil, especially for the adjustment of prices.

Learning with uncertain inflation target

This paper studies the effects of a temporary increase in the inflation target in a model with adaptive learning and imperfect credibility of the central bank. In such a setup the private sector has to learn the model governing the economy and assess if the change in the interest rate is due to a standard interest rate shock or to a persistent shock to the inflation target. We find that the analytical condition that guarantees asymptotical E-stability under full credibility is the same that we obtain for the calibrated version of our model under imperfect credibility. Under full credibility the transition to the long-run equilibrium is faster and the variance of inflation is lower. Our results are consistent with the view that increasing the inflation target can be used as a policy instrument without unanchoring expectations.

How Well Do Contemporary Theories Explain Floating Exchange Rate Changes in an Emerging Economy: The Case of EUR/PLN

The purpose of this paper is to investigate how well contemporary exchange rate theories explain fluctuations in exchange rates of emerging economies, before and after the Global Financial Crisis (GFC). As an example, the EUR/PLN exchange rate in 1999–2015 was selected as the currency pair that was the most liquid in the region; it had a stable exchange rate regime in the given period. The whole analysis was performed within the selected linear vector error correction (VEC) model framework. VEC models incorporate such well-known theories as purchasing power parity (PPP), the uncovered interest rate parity (UIP), the Harrod–Balassa–Samuelson (HBS) effect, the terms of trade (TOT), the net financial asset (NFA) theory and risk premium. The results indicate the greater importance of external factors—in particular, the Euro Area (EA) short-term interest rates and EA price shocks after the GFC. The main sources of EUR/PLN variability were found to be exchange rate shocks, terms of trade shocks and foreign and domestic short-term interest rate shocks, as well as foreign price shocks. These results are of particularly high importance for our own exchange rate shocks and indicate that a large part of exchange rate fluctuations in EUR/PLN still remains unexplained.

Will Demographic Changes Affect Monetary Policy with Interest Rate Shocks in Indonesia?

Changes in the demographic structure and its impact on the economy are becoming interesting issues in almost all countries in the world, including Indonesia. Until 2030, the working age group dominates almost 60 percent of the total population in Indonesia. This phenomenon is a valuable asset which should be used optimally. Moderate adjustment of interest rate policy is an effort applied by Bank Indonesia to maximize the access to credit and public savings. Therefore, this study aims to determine the effect of demographic aspects and the real sector on the effectiveness of monetary policy in the presence of interest rate shocks. This study employed time series data with a time period of 1987Q1 – 2020Q4 in Indonesia. The analysis was performed by using time varying parameter-vector autoregressive (TVP-VAR) and fully modified-ordinary least square (FM-OLS). The results revealed that the population and the elderly population aspects had significant positive effects on the monetary policy, while the variable of productive age and the number of dependence aspects has significant negative effects. The relationship between the real sector and the monetary policy has a different relationship, such as a positive relationship between the savings and technology variables and the domestic credit variable which has a significant negative relationship with the monetary policy.

The Impact of Financial Development and Macroeconomic Fundamentals on Nonperforming Loans among Emerging Countries: An Assessment Using the NARDL Approach

The relationship between financial development indicators and non-performing loans (NPLs) has garnered significant attention, especially in emerging countries. The puzzle of whether financial sector development increases or decreases Non-performing Loans (NPL)s has not been resolved to the satisfaction of the curious mind. This research attempts to answer the above question by studying the asymmetric and symmetric association between financial sector development and NPLs, by utilizing the novel non-linear autoregressive distribution lag (NARDL) and the linear autoregressive distribution lag (ARDL) approach. Moreover, to make the study inclusive, we have added a series of proxies to measure financial sector development and macroeconomic vulnerabilities. Our main findings confirm that financial sector development and NPLs move together in the long run, and there is significant evidence of the asymmetric relationship. We infer that NPLs react differently to the negative and positive shocks of financial development and macroeconomic variables both in the short and long run. In the long-run positive shocks in financial intermediation, banking efficiency, banking depth, banking stability index, and banking non-interest income significantly impact the NPLs in emerging countries. The positive shocks of financial sector development (financial intermediation and size of banks) increase NPLs in emerging countries and vice-versa. Furthermore, regarding the macroeconomic variables, the positive shock of inflation, unemployment, and interest rate positively affect NPLs. The empirical analysis also concludes that in the long-run foreign bank presence is an insignificant factor affecting NPLs in the selected countries. This study emphasizes that, unlike the linear model, the non-linear model provides a more realistic and robust result by highlighting hidden asymmetries, which will help policymakers make appropriate strategic decisions.

Effects of US interest rate shocks in the emerging market economies: Evidence from panel structural VAR

We examine, using a monthly dataset from 2007 to 2020, the US interest rate shocks’ effects on exchange rates, broad money aggregates, and foreign exchange reserves in emerging market economies (EMEs) post global financial crisis. To evaluate the impact of unconventional monetary policy initiatives, we employ Wu-Xia’s shadow interest rates. There are two parts to the methodology. The first part focuses on the identification of the unanticipated US interest rate shock in a SVAR model. In the second part, we incorporate the US interest rate shock into the panel structural VAR to analyze its impact on 29 countries from various regions. A positive shock to US interest rates depreciates the exchange rate of EMEs against the US dollar. According to our findings, it results in a decline in the broad money aggregate and foreign exchange reserves. The findings are consistent across multiple EME regions.

아파트 매매가격 및 전세가격의 지역별 파급효과

We analyze the regional ripple effects of both the sale prices and cheonsei prices using the global VAR(GVAR) model. The interest rate shock causes the regional sale prices to fall. Moreover, the greatest responses to the shock are those of Gangnam-gu, etc. because of there were many transactions for investment purpose. When interest rate rose, the cheonsei price in Gangnam-gu reacted greatly. Conversely, if interest rates fall, the cheonsei demand to live in Gangnam-gu increases. Furthermore, the response of sale price to the interest rate shock are greater than those of the cheonsei prices. Whereas, a positive shock on the sale price in Gangnam-gu increases the sale price there. It also raises the sale prices of the surrounding area in a similar pattern. The shock on the sale price in Gangnam-gu also increases the cheonsei price in Gangnam-gu. In addition, an increase in the sale price in Gangnam-gu leads to increases of cheonsei prices in other regions. Therefore, the recent rise of the base rate can negatively affect the sale prices, and thus a decrease in the sale price spreads to the surrounding areas. Accordingly, it is time for policy alternatives to make a soft landing in sale prices.

Growing with inequality: a DSGE model with heterogeneous human capital and endogenous economic growth

ABSTRACT We try to explain the simultaneous increases in economic growth and income inequality in China with a heterogeneous endogenous growth-based DSGE model. It is found that: First, our model can simulate the positive correlation between economic growth and income inequality in China. China’s economic development has created better conditions and incentives for the accumulation of human capital of workers with high initial human capital, thus stimulating them to contribute more to economic growth, but this widens the income inequality simultaneously. Second, the change in economic growth and the change in income inequality also exhibit a positive correlation under the influence of various policy shock. Any shock that raises economic growth, such as different types of technology shock and investment shock (after 8 quarters), will correspondingly widen income inequality. Conversely, any shock that reduces economic growth, such as fiscal spending shock, interest rate shock and investment shock (before 8 quarters) will correspondingly reduce income inequality. Third, the government’s preference for workers with high initial human capital in the implementation of macroeconomic policies determines the positive correlation between the change in economic growth and in income inequality. Workers with high initial human capital are central to the effectiveness of macroeconomic policies.

RESPONSES OF RICE OUTPUT TO MONETARY POLICY SHOCK IN NIGERIA FROM 1981-2020

The research looked at how monetary policy shocks affects rice output in Nigeria. The study made use of time series data spanning the year 1981 to 2020 obtained from the Central Bank of Nigeria (CBN) and National Bureau of Statistics (NBS). The shocks were detected using the Vector Auto-Regressive model (VAR). The study revealed that unit shocks in interest rates, inflation, and exchange rates all harmed rice output with rice output responding more to a unit shock in interest rate. Monetary policy shocks have both positive and negative effects on rice output at different periods. This study concluded, however, that the timing of monetary policy instruments change has serious implications for rice output, and that rice output can bring about positive change in Nigeria's agricultural output if monetary policy instruments are well managed. The study recommended that the monetary authority should ensure that various policies are implemented to ensure that the interest rate to the agricultural sector is within a single digit, accessible, affordable, and sustainable to ensure greater productivity in the sector, as it accounted for the greatest shock in comparison to other monetary variables, the monetary authority should pursue an exchange rate policy that encourages investment in the Nigerian economy's real sector while maintaining market stability.

Trans-Atlantic Transmission Of Interest Rate Shocks: Any Macroeconomic Concern For Nigeria?

The interconnectivity of global economies has created undue uncertainties in severeal domestic economies. As a result, this paper specifically investigates the trans-Atlantic transmission of interest rate shocks with a view to identifying any macroeconomic concern for Nigeria using Annual time series data from World Bank’s Development Indicators 2020. To achieve the objectives of this study, various econometric tests were carried out on the variables such as the Augmented Dickey- Fuller (ADF) test, variance decomposition test as well as the impulse response test. The impulse response analysis of our VAR model shows that Nigerian variables respond significantly to shocks from foreign variables. The study therefore concluded that shocks in Nigeria are mostly from across the Atlantic. In line with this, the study recommended that monetary authorities in Nigeria should base their policy making on foreign shocks with a view to stabilizing the macroeconomic environment.

What affects the fraction of collateral-constrained households in the housing market? The case of Taiwan

This research develops a Two-Agent New Keynesian (TANK) framework with household type switching to investigate the determinants of a time-varying fraction of collateral-constrained households. As a practical application, the model is estimated with Taiwanese data via Bayesian methods. We first validate our model to fit the business cycle properties of Taiwan during 2008Q1–2019Q4 and analyze the dynamics of the fraction of collateral-constrained households in responses to preference shocks, sectoral productivity shocks and interest rate shocks. The results indicate that the fraction of collateral-constrained households increases with higher output growth, more housing consumption, higher interest rates and higher expected housing prices. Our findings affirm that collateral-constrained households are generally more sensitive to income changes than interest rate changes. They also imply that maintaining a fairly reasonable property price can ensure an adequate fraction of collateral-constrained households as well as stabilize the housing market in Taiwan.

The Transmission Mechanisms and Impacts of Oil Price Fluctuations: Evidence from DSGE Model

This paper constructs an open economy dynamic stochastic general equilibrium (DSGE) model with oil to investigate the transmission mechanism and impact effects of oil price fluctuations driven by different factors on China’s macroeconomy using quarterly data from 1996 to 2019. The results show that the international crude oil supply-driven oil price decline promotes positive output growth in the short run through the positive cost effect of the supply channel, and the production regulation cost will dampen the incentive to invest in the new energy sector in the long run. Domestic economic development demand-driven oil price increases act on the demand channel, driving output and oil prices to fluctuate in the same direction, generating a negative real balance effect on the economy through the interest rate channel. The oil-specific demand driven by foreign nominal interest rate shocks is transmitted through the exchange rate channel, triggering imported inflation, lower aggregate demand, and lower output. Different sources of oil price fluctuations have different transmission mechanisms and thus differential effects. For this reason, based on the root causes of oil price fluctuations, policy recommendations to deal with international oil price fluctuations in the new situation are proposed at the supply level, demand level, and international level.

Output determination and autonomous demand multipliers: An empirical investigation for the US economy

This paper aims to assess whether shocks in demand and its components can affect short- and long-run output dynamics, challenging the macroeconomic literature that relegates its effects to the short run. We apply SVAR modelling to US quarterly data (1954–2020) in order to identify shocks and compute multipliers associated with demand and its autonomous components (i.e. exports, government expenditure, credit-financed consumption, and private residential investment) while controlling for monetary policy. Our findings suggest that: (i) demand produces long-lasting effects on GDP with multipliers greater than one; (ii) multipliers are higher for credit-financed consumption and private residential investment, followed by government expenditure and exports; (iii) monetary policy affects output through residential investment. Our results support those theories suggesting that supply accommodates to demand by varying installed capacity and that monetary policy is ineffective in stimulating economic activity due to the low responsiveness of GDP to interest rate shocks.

The Spillover Effects of Chinese Shocks on the Belt and Road Initiative Economies: New Evidence Using Panel Vector Autoregression

This paper investigates the spillover effects of Chinese real and monetary sector shocks on the Belt Road Initiative (BRI) economies. The study adopted a panel vector autoregression (PVAR) estimation technique to analyse the dynamic propagation of Chinese shocks in the real sector (gross domestic product (GDP) and trade openness (OPEN)) and monetary sector (nominal interest rate (NIR)) for a sample of 50 BRI countries from 2000 to 2017. The main results revealed that Chinese income shocks positively spill over to all macroeconomic variables except BRI countries’ consumer price index (CPI). However, the Chinese trade openness shock only has a temporary positive spillover to BRI international trade and a temporary negative spillover on its monetary policy. In addition, the Chinese monetary policy shock has a negative spillover on GDP and a positive spillover on CPI in BRI economies. Chinese shocks, however, do not constitute a significant source of variation in any interest variable. As explained by the Chinese income shock, the BRI interest rate is the highest percentage of variable variation accumulated over time. Further, the highest variation of Chinese trade shock is BRI trade openness, and lastly, the highest variation of Chinese interest rate shock is CPI in BRI economies. The beggar-thy-neighbour effect may dominate the positive trade effect and is a negative impact of the Chinese shocks. Hence, BRI economies should alleviate the adverse shocks since the upcoming rapid growth from the Chinese has disturbed the BRI economies. Our results reveal the importance of Chinese development on BRI partners’ economies and the significance of Chinese shocks in real and monetary sectors in assisting policymakers in designing international and monetary policy for BRI economies.

The impact of fiscal and monetary policy on unemployment rate in Nigeria (1981- 2020)

This study empirically examined the impact of fiscal and monetary policy on unemployment rate using data between the periods 1981 to 2020 by the use of Vector Autoregressive (VAR) model as the major statistical technique of analysis. The data used for the study were annual time series secondary data sourced from Central Bank Statistical Bulletin (CBN) and National Bureau of Statistics (NBS). From the findings, the coefficient of determination (R2) is 0.652 which shows that about 65 percent variations in the unemployment rate were explained by the independent variables. Also, its adjusted counterpart is 0.602 and its shows that about 60 percent growth in unemployment rate can be explained by the independent variables. The unit root test results indicated that all the variables were stationary at first difference and co-integration test confirmed a long run relationship among the variables. The F-stat value of 4.445 confirms that the overall test is significant. The AR root test confirms that the estimated model is stable. Also, the serial correlation LM test and heteroskedacity test confirm that there is no autocorrelation and heteroskedacity in the model.The findings show that government expenditure and interest rate has negative and significant effect on unemployment rate at lag period 2. Government tax was found to be negative and insignificant at lag period 2. Money supply was found to have a positive and significant at lag period 1. By implication, the findings showthat government expenditure, money supply and interest rate are major determinants of unemployment rate in Nigeria since they were found to be statistically significant. Also, the impulse response function of unemployment shows that unemployment rate that has a negative relationship with its past values from periods except in the first, 2nd, 3rd, 4th and 5th periods.Furthermore, from the forecast error variance decomposition (FEVD), it is obvious that the highest innovation was due to government tax and money supply, while the shock of government expenditure and interest rate in Nigeriawere the lowest over the periods. The study concludes that there is need for diverse strategies that will be targeted towards employment creation in Nigeria. Thus, an expansionary fiscal and monetary policy should be encouraged to support employment generation in the country.