Interest Rates In Countries Research Articles

Business cycles, informal economy, and interest rates in emerging countries

This paper recognizes the importance of a large informal economy and interest rate fluctuations for business cycles in emerging countries. I document (1) a positive relationship between the relative volatility of consumption to output and the size of the informal economy, and (2) countercyclical interest rates in emerging countries. I show that in a two-sector real business cycle model of a small open economy with a poorly measured informal sector, an increase in country interest rate generates a contraction in output, consumption, investment, hours, an improvement in trade balance-to-output ratio, and an expansion of informal sector.

The Special FX Market

We present a model of the foreign exchange market with 2 types of investors: cash-constrained carry traders, and short-sighed boundedly rational technical traders. We show that the interactions between both agents explain several of the well-documented puzzles of the exchange rate. In particular, the model provides a theoretical base for the fact that currencies of high interest rate countries tend to crash, sometimes without a clear fundamental trigger.

Surplus liquidity, central bank losses and the use of reserve requirements in emerging markets

AbstractSince the turn of the millennium, stocks of foreign reserves held by central banks in many emerging markets and developing countries have exceeded currency in circulation. To steer money market rates, these central banks have been absorbing liquidity from, rather than providing it to, the banking sector in their regular monetary policy operations. When interest rates in countries with major reserve currencies are low, the yield on foreign reserves is low. A higher interest rate on liquidity‐absorbing operations may expose central banks to losses. Although a central bank is not a profit‐maximizing institution, central bank losses can undermine the independence of the central bank. Using data for a large panel of central banks, this paper provides some evidence that central banks tend to apply low‐remunerated reserve requirements when profitability is at stake.

Monetary Policy Accommodation at the Lower Bound

Monetary policy was too tight in many countries following the financial crisis, due to the lower bound on interest rates. This is likely to have prolonged the recession that followed. This point is illustrated with an assessment of monetary accommodation in the US since the financial crisis, and the accommodation achieved through negative interest rates in countries that have adopted these. The lower bound will likely give rise to considerable economic costs in the future, as it has in the recent past. There is an urgent need to consider how policy tools and frameworks should be adapted.

Factors Influencing Non-Performing Loans in Commercial Banks: The Case of Banks in Selangor

Non-performing loans (NPL) is a worldwide issue that affects financial markets stability in general and banking industry viability in particular. The net non-performing loan (NPL) ratio in the banking system since the Asian financial crisis has gradually been in decline from 13.6% in December 1998 to 2.8% in May 2008. Government intervention to non-performing loan recovery strategies have contributed significantly in the decline. The Malaysian government and banks have succeeded in removing the non-performing loans (NPL) from banks Balance Sheet. This study examines the factors influencing non-performing loans in commercial banks in Selangor. A quantitative research approach is employed in this research following the positivist assumption with a realist ontology and objectivist epistemology. Data was collected using a probabilistic sampling method, particularly a stratified random sampling technique. The adapted survey questionnaire employed in this study and distributed 150 questionnaires and successfully received 130 questionnaires. Overall, the researcher has discussed about the findings of the analysis that was conucted using the SPSS software. Descriptive approach, correlation and multiple regression analysiss had been shown during the analysis. The descriptive approach displayed direct results while the correlation displayed the relationship between the dependent variable (non-performing loan) and the independent variables (standard of living, consumer income, economy of the country, bank interest rate). In this research, found three factors that influencing non-performing loan in Malaysia which are consumers’ income, the economy of the country and bank interest rate. The bank will found that the bank interest rate affect the rate of non-performing loan increase. For the future researchers, this research will benefit them as well. If they are doing their researches which are related to this topic, they can gather everything they want easily. Besides that, it will benefit the researcher who is going to do this research study in Malaysia. This is because the information in Malaysia is limited.

Large and State-Dependent Effects of Quasi-Random Monetary Experiments

The trilemma of international finance explains why interest rates in countries that fix their exchange rates and allow unfettered cross-border capital flows are largely outside the monetary authority’s control. Using historical panel-data since 1870 and using the trilemma mechanism to construct an external instrument for exogenous monetary policy fluctuations, we show that monetary interventions have very different causal impacts, and hence implied inflation-output trade-offs, according to whether: (1) the economy is operating above or below potential; (2) inflation is low, thereby bringing nominal rates closer to the zero lower bound; and (3) there is a credit boom in mortgage markets. We use several adjustments to account for potential spillover effects including a novel control function approach. The results have important implications for monetary policy.

Why so Low for so Long? A Long-Term View of Real Interest Rates

Prevailing explanations of the decline in real interest rates since the early 1980s are premised on the notion that real interest rates are driven by variations in desired saving and investment. But based on data stretching back to 1870 for 19 countries, our systematic analysis casts doubt on this view. The link between real interest rates and saving-investment determinants appears tenuous. While it is possible to find some relationships consistent with the theory in some periods, particularly over the last 30 years, they do not survive over the extended sample. This holds both at the national and global level. By contrast, we find evidence that persistent shifts in real interest rates coincide with changes in monetary regimes. Moreover, external influences on countries' real interest rates appear to reflect idiosyncratic variations in interest rates of countries that dominate global monetary and financial conditions rather than common movements in global saving and investment. All this points to an underrated role of monetary policy in determining real interest rates over long horizons.

Monetary Policy Accommodation at the Lower Bound

Monetary policy was too tight in many countries following the financial crisis, due to the lower bound on interest rates. This is likely to have prolonged the recession that followed. This point is illustrated with an assessment of monetary accommodation in the US since the financial crisis, and the accommodation achieved through negative interest rates in countries that have adopted these. The lower bound will likely give rise to considerable economic costs in the future, as it has in the recent past. There is an urgent need to consider how policy tools and frameworks should be adapted.

Implications of Monetary Policy for Credit and Investment in Sub-Saharan African Countries

This paper investigates the implications of monetary policy for domestic investment through its effects on bank lending to the private sector and interest rates in sub-Saharan African countries. The study argues that the pursuit of inflation control through contractionary monetary policy carries high costs in terms of reduced investment and ultimately slower economic growth. The econometric evidence based on a sample of 37 sub-Saharan African countries over 1980-2012 shows that contractionary monetary policy affects domestic investment negatively both indirectly through the bank lending or quantity channel as well as directly through the interest rate or cost of capital channel. The results suggest that policies that maintain a low interest rate regime would stimulate bank lending to the private sector, which in turn would boost domestic investment. The results have important policy implications for African countries in their efforts to achieve and sustain high growth rates as a means of reaching their national development goals notably employment creation and poverty reduction.

Sector heterogeneity and credit market imperfections in emerging markets

This paper shows that the impact of country interest rate shocks on emerging markets' economic activities can be associated with credit market imperfections affecting principally non-tradable activities. I present novel evidence documenting that tradable and non-tradable activities respond asymmetrically to changes in credit conditions in emerging markets. I show that country interest rate shocks are amplified through non-tradable activities, and that local credit substantially explains their output growth. Unlike the non-tradable sector, tradable activities are not significantly affected by changes in local credit conditions. To rationalize these findings, I introduce a small open economy model with heterogeneous access to international borrowing that accounts for the asymmetric response of tradable and non-tradable activities.

The effect of North Korean threats on financial markets in South Korea and Japan

This paper examines the effects of North Korean threats, as measured by the proprietary North Korean Threat Index (NKTI), on financial markets in South Korea and Japan. We examine the effects of the threats on stock markets, foreign exchange markets, and overnight interest rates. We consider causality in mean and variance tests to determine any link between the NKTI and financial variables. The causality-in-mean test results indicate the presence of a causal link running from North Korean threats to stock returns and exchange rate returns in both countries, but no significant link to the overnight interest rate in either country. The causality-in-variance test results indicate no significant impact emanating from North Korean threats. Integrating the North Korean economy into the global economy stands to eliminate these threats and thus to contribute to regional financial stability.

Exchange Rate Effects of Portfolio Shifts?

Using the Branson model as an example, this paper seeks to clarify the role of interest rate and exchange rate changes in asset market models. Focusing on short-term adjustments, it is shown that portfolio shifts mainly affect relative interest rates in different countries. Only to the extent that portfolio shifts lead to changes in the money demand or money supply, are exchange rates affected as well. The announcement of German monetary union in 1990 is used as an example to illustrate the relative significance of interest rate changes as shock absorbers.

Government debt-interest rate nexus in G7 countries over a long horizon

The goal of this paper is to investigate the influence of government fiscal positions on long-term interest rates in G7 countries during the period 1948-2012. Our results suggest that a one percentage point increase in the stock of government debt in GDP is associated with an increase in government bond yields of 2.27-6.28 basis points, while an increase in government deficit in GDP of one percentage point is associated with an increase in government bond yields of 3.15-14.3 basis points. In addition, our results indicate that under reasonable assumptions and in the presence of widening output gaps, the neoclassical growth model predicts a rather low degree of crowding-out (around 36 percent), while the narrowing of the output gap leads to a complete crowding-out.

Consequences of Different Eurobond Proposals

AbstractWe analyze various Eurobond proposals and show that they have different effects on moral hazard, interest rates, international transfer payments and the necessity for European fiscal centralization. On closer inspection, these consequences are more diverse than the discussion on Eurobonds so far suggests. For instance, Eurobonds might increase rather than decrease marginal interest rates in weaker countries. Some proposals lead to international transfer payments while others do not. Some require changes to the Treaty on the Functioning of the European Union, others require changes to national constitutions, and others yet require both. Some proposals, while not necessitating such legal change, may still have mutual advantages for the issuing states.

Sector Heterogeneity and Credit Market Imperfections in Emerging Markets

This paper shows that the impact of country interest rate shocks on emerging markets’ economic activities can be associated with credit market imperfections affecting principally non-tradable activities. I present novel evidence documenting that tradable and non-tradable activities respond asymmetrically to changes in credit conditions in emerging markets. I show that country interest rate shocks are amplified through non-tradable activities, and that local credit substantially explains their output growth. Unlike the non-tradable sector, tradable activities are not significantly affected by changes in local credit conditions. To rationalize these findings, I introduce a small open economy model with heterogeneous access to international borrowing that accounts for the asymmetric response of tradable and non-tradable activities.

Business Cycles, Informal Economy, and Interest Rates in Emerging Countries

This paper recognizes the importance of a large informal economy and interest rate fluctuations for business cycles in emerging countries. I document (1) a positive relationship between the relative volatility of consumption to output and the size of the informal economy, and (2) countercyclical interest rates in emerging countries. I show that in a two-sector real business cycle model of a small open economy with a poorly measured informal sector, an increase in country interest rate generates a contraction in output, consumption, investment, hours, an improvement in trade balance-to-output ratio, and an expansion of informal sector.

The effect of real-time fiscal policy on sovereign interest rates in OECD countries

The aim of this study is to investigate the effect of real-time projections of fiscal policy stances on government bonds long-term interest rates using a panel of 20 OECD countries between 1992 and 2008. To deal with endogeneity arising from forecasts of fiscal balances the paper exploits instrumental variables and GMM estimators together with the variation in real-time primary balances. The study shows how a static specification that does not include the one-period lag of the interest rate is prone to serial correlation and to downward bias in standard errors. To correct the bias, a dynamic specification with the lagged interest rates used as explanatory variable should be used due to the intrinsic persistent behavior of the interest rates. Results show that when the persistency of the interest rates is taken into account, it corrects the bias in standard errors of the estimates, and the correlation between fiscal policy variables and sovereign rates disappears: the inertia of the behavior of interest rates is the only variable affecting the relation.

Interest Rates, Leverage, and Business Cycles in Emerging Economies: The Role of Financial Frictions

Countercyclical country interest rates have been shown to be an important characteristic of business cycles in emerging markets. In this paper we provide a microfounded rationale for this pattern by linking interest rate spreads to the dynamics of corporate leverage. For this purpose we embed a financial accelerator into a business cycle model of a small open economy and estimate it on a novel panel dataset for emerging economies that merges macroeconomic and financial data. The model accounts well for the empirically observed countercyclicality of interest rates and leverage, as well as for other stylized facts. (JEL E13, E32, E43, E44, F41, O11)

The Effects of Economic and Financial Development on Financial Inclusion in Africa

This study provides empirical evidence on the effects of economic and financial development on financial inclusion in Africa, using panel FMOLS for the 2005-2014 period. The study shows that economic growth has a significant positive impact on financial inclusion, meaning that African countries with higher economic growth have more inclusive financial systems. GDP per capita has a significant positive impact on financial inclusion. That is, income is an important factor in explaining the level of financial inclusion in Africa. It is, as well, established in this study, that although both economic and financial development promote financial inclusion, though the effects of economic development are much stronger. Also, inflation is negatively linked to financial inclusion, and as well insignificant across all specifications. Deposit interest rate is positively linked to financial inclusion, though insignificant. The low deposit interest rates in African countries do not encourage inclusive financial systems. Population, though positive, is insignificant. Internet has positive significant impact on financial inclusion, meaning that internet access is indispensable in a fast-moving and digital African economy. Literacy is also statistically significant, meaning that adult literacy is an important factor in explaining the level of financial inclusion in Africa. As well, Islamic banking presence and activity are associated with higher financial inclusion.

Pricing Risks Across Currency Denominations

We document a novel empirical regularity that investors in low interest rate countries earn substantially higher Sharpe ratios on identical carry trade strategies than investors in high interest rate countries. We further document that bilateral exchange rate volatilities are increasing in interest rate differentials between currencies. These observations place new important restrictions on no-arbitrage models of international asset pricing. Our analysis naturally gives rise to a new non-parametric procedure to estimate country-specific stochastic discount factors (SDFs) from exchange rate data. In support of our approach, out-of-sample, the estimated SDFs sort linearly with national output gap fluctuations, and price risks in international equity markets.