International Interest Rates Research Articles

Sustainability of lending diversification of sub-Saharan African low-income countries

The momentum in sub-Saharan low-income countries is leading to diversifying their funding sources to cover large infrastructure expenditures. This situation meets the expectations of international investors who are still willing to explore new opportunities. Recent access to the Eurobond market by these new players has resulted in the growing substitution of traditional concessional loans by market ones in countries with low-debt portfolios. Thus, a new sustainability approach is required to include risk premiums and potentially versatile investor behaviors. First, we use a theoretical model to show that in a context of low international interest rates, debtor countries can continue to stabilize their level of debt either through budget deficit, if it remains below a given sustainability threshold, or through budget surplus in a downturn context (high-interest rates and spreads). Second, the versatile behavior of investors could be challenging. Third, global liquidity greatly influences the debt dynamics of SSA countries so it matters more for bond spreads than domestic factors. As our empirical study shows that the current debt situation of sub-Saharan African low-income countries increasingly involved in the Eurobond market remains under control. To avoid the worst-case scenario, strong institutions should be a priority, along with appropriate management tools and methods of debt monitoring to cope with all potential vulnerability caused by undesirable side effects of such unstable behaviors.

Time varying characteristics of factors affecting carbon price in emission trading scheme in China: Evidence from SV-TVP-VAR approach

Analysis of the factors influencing the price of carbon emissions trading in China and its time-varying characteristics is essential for the smooth operation of the carbon trading system. We analyse the time-varying effects of public concern, degree of carbon regulation, crude oil price, international carbon price and interest rate level on China’s carbon price through SV-TVP-VAR model. Among them, the quantification of public concern and the degree of carbon emission regulation is based on microblog text and government decisions. The results show that all the factors influencing carbon price are significantly time-varying, with the shocks of each factor on carbon price rising before 2019 and turning significantly thereafter. The short-term shock effect of each factor is more significant compared to the medium- and long-term, and the effect almost disappears at a lag of six months. Thanks to public environmental awareness, low-carbon awareness and the progress of carbon market management mechanisms, public concern has had the most significant impact on carbon price since 2019. With the promulgation of relevant management measures for the carbon market, relevant regulations on carbon emission accounting, financing constraints, and carbon emission quota allocation for emission-controlled enterprises have become increasingly mature, and carbon price signals are more sensitive to market information. The above findings provide substantial empirical evidence for all stakeholders in the market, who need to recognize that the impact of non-structural factors on the price of carbon varies over time. Government intervention also serves as a key aspect of carbon emission control and requires the introduction of relevant constraints and incentives. In particular, emission-controlling firms need to focus on the policy direction of the carbon market, and focus on the impact of Internet public opinion on business production while reducing carbon allowance demand and energy dependence.

International interest rate comovements and monetary policy in Bazil

This article shows that international spillovers or coordination in central bank interest rate setting are significant components of the Brazilian Taylor rule. For this, the short-term interest rate comovements of 28 countries and Euribor were estimated through a dynamic factor model. A nonlinear reaction function for the Central Bank of Brazil that includes global and regional factors evidenced that monetary policy in Brazil is influenced by the policy of other broad groups of countries and not just the United States and the Eurozone.

On the (de)stabilization role of protectionism

To what extent protectionism affects growth and (de)stabilizes the economies? Although the impact of protectionism on growth has been widely explored without reaching a consensus, few has been said on its impact on macroeconomic stability. The present paper attempts to gauge more precisely its implications using a Barro-type (Barro, 1990) endogenous growth model with public debt and credit constraint where tariffs are a proxy of protectionism. Our main result is to show that when the debt level is high, and the share of foreign goods in total consumption is large enough, increasing tariffs may have a destabilizing effect generating some expectation coordination failures between multiple equilibria. We also exhibit some trade-off between tariffs and growth as tariffs are beneficial only to the low growth equilibrium which may only appear when the international interest rate is low enough. Finally, focusing on the local stability property, we show that the high BGP is always characterized by local indeterminacy, while the low BGP is always a saddle point. We then prove that tariffs may be responsible for the existence of large self-fulfilling fluctuations.

On the propagation mechanism of international real interest rate spillovers: evidence from more than 200 years of data

ABSTRACT This article analyzes the real interest rate transmission mechanism across the United States, Japan, France, Germany, Holland, Italy, Spain and the United Kingdom over a period of more than 200 years. Based on a time-varying parameter vector autoregressive (TVP-VAR) connectedness methodology, the empirical results suggest that the size of the international real interest rate spillovers ranges between 30% and 75% across the sample period. Furthermore, it is shown that these spillovers increase during crisis periods, such as the two World Wars, the Great Depression of 1929, the 1980 and 1990 recessions, or the Great Financial Crisis of 2009. More interestingly, our findings illustrate the position of each of these eight countries as net transmitters or receivers of monetary policy shocks over time. Our analysis contributes to the debate on whether the conduct of monetary policy in a country should consider its international spillovers, suggesting the need for more coordinated monetary policies especially during periods of economic crises.

The boom of corporate debt in emerging markets: Carry trade or save to invest?

The decline in international interest rates following the global financial crisis encouraged firms in emerging markets to increase their corporate bond issuance abroad. Evidence shows that issuing offshore debt increases cash holdings, suggesting firms may exploit interest rate arbitrage. We argue that increasing contemporaneous cash holdings may also be undertaken for a “save to invest” motive to finance future investment opportunities. Using a sample of nonfinancial listed firms from 15 emerging market economies from 2001 to 2016, we show that companies accumulate cash when carry trade is favorable; however, we find that the increased cash holdings substantially revert in the following two periods, consistent with arguments for a “save to invest” motive. Indeed, offshore debt has a significant impact on both current and next-year investment.

Transmission of risk to China's construction industry due to international interest rate fluctuations

PurposeUnder the trend of global economic integration and the new context of stagflation, frequent fluctuations in international interest rates are exerting far-reaching impacts on the world economy. In this paper, the transmission mechanism of the impact of fluctuations in international interest rates (specifically, the American interest rate) on the bankruptcy risk in China's pillar industry, the construction industry (which is also sensitive to interest rates), is examined.Design/methodology/approachUsing an improved contingent claims analysis, the bankruptcy risk of enterprises is calculated in this paper. Additionally, an individual fixed-effects model is developed to investigate the mediating effects of international interest rates on the bankruptcy risk in the Chinese construction industry. The heterogeneity of subindustries in the industrial chain and the impact of China's energy consumption structure are also analysed in this paper.FindingsThe findings show that fluctuations in international interest rates, which affect the bankruptcy risk of China's construction industry, are mainly transmitted through two major pathways, namely, commodity price effects and exchange rate effects. In addition, the authors examine the important impact of China's energy consumption structure on risk transmission and assess the transmission and sharing of risks within the industrial chain.Originality/valueFirst, in the research field, the study of international interest rate risk is extended to domestic-oriented industries. Second, in terms of the research content, this paper is focused on China-specific issues, including the significant influence of China's energy consumption structure characteristics and the risk contagion (and risk sharing) as determined by the current development of the Chinese construction industry. Third, in terms of research methods a modified contingent claim analysis approach to bankruptcy risk indicators is adopted for this study, thus overcoming the problems of data frequency, market sentiment and financial data fraud, which are issues that are ignored by most relevant studies.

The Mundell‑Fleming Model and Macroeconomic Stabilization Policies

This paper analyzes the fiscal policy implications set in the Mundell‑Fleming (M‑F) model and its effectiveness in emerging economies. It also widens the scope of the policy mix with alternative exchange rates. The empirical evidence about the economies of Chile (1991–2003) and Colombia (1994–2004), about institutions, fiscal policy rule, and the eurozone conditions (1999), were considered relevant The paper has three sections a. The budget‑surplus fiscal policy rule and policy effectiveness, b. The role of institutions in setting policy rules, c. The experience of the Chilean and Colombian economies concerning fiscal policy rules within the M‑F framework. The main conclusion is that as long as country risk is lower due to countercyclical fiscal policy rules, governments have an alternative means of getting funds at a lower international interest rate. The fiscal policy effect on GDP (output)becomes positive.

Assessing the Effect of International Lending Interest Rate Volatility on Government Infrastructural Expenditure

Spending on government infrastructure in Nigeria is faced with several economic challenges among which international lending rate volatility is significant. This study focuses on determining the effect of interest rate fluctuation on government infrastructural expenditure between 1993 and 2022. Its theoretical footing is the loanable fund theory, as it employs the Vector Error Correction framework to analyse the various data sourced from the World Development Indicators. The stationarity test confirmed that all the data were stationary at levels. Empirical results confirmed that international lending rate fluctuation has insignificant positive impact on public infrastructural spending (government infrastructural expenditure) in Nigeria. It was also observed that a long run relationship exists between international lending interest rate fluctuation and infrastructural development in Nigeria. It was therefore recommended that the regulatory authorities should strive to maximize this opportunity to design appropriate long term policies that can enhance infrastructural expansion through the appropriate modelling of international interest rate regime rather than putting in place short term measures that are not sustainable to infrastructural development. This paper proposes an innovative bond, the floating-interest infrastructure bond, which could attract private finance in infrastructure projects. This paper explains how private finance can be channelized into infrastructure investment by the sharing of spillover tax revenues between the government and the investors using a floating-interest-rate infrastructure bond. The private sector, such as banks and postal banks, will develop long-term deposits to provide loans for infrastructure development. Unlike the usual government bond, which provides a fixed interest rate, the proposed floating-interest-rate infrastructure bond pays a floating interest. Spillover effect depends on a number of factors, suc

Assessment of the Effects of Monetary Policy Shocks from ECOWAS Member Countries to Nigeria

The paper evaluated the effects of monetary policy shocks from ECOWAS Member Countries to Nigeria using a combination of quarterly, annual time-series and panel data spanning from 1995–2021. The Standard Global Vector-Autoregressive (GVAR) Model of analysis was used to draw structural inference for the study using data on: consumer prices, international commodity prices (oil, agricultural raw material and metal ore), exchange rate, interest rate (short and long run), real output, money supply, and export diversification index. The result of the Impulse Response Function (IRF) revealed that shocks resulting from monetary policy transmission from the ECOWAS member Countries to Nigeria has diverse effects on Nigeria and is largely determined by the extent of monetary policy accommodative stance. The shock that may occur is likely to be country-specific because ECOWAS is an economic union that hardly has the foundation to share common economic or monetary risk. Additionally, the extent of trade flow between Nigeria and the rest of ECOWAS, determines the tendency that such shocks affect Nigeria. Finally, whether ECOWAS is a shock source, or a channel of transmission determines how much of an impact shocks from that region will have.

A semi-parametric study on dynamic linkages among international real interest rates

Linkages between real interest rates among countries have been extensively investigated in the literature as it has important policy implications for the monetary authorities in the policy making process. Even in a perfectly efficient international interest rate market, equal real interest rates are not expected because of the existence of transaction costs and hence nonlinear approaches that take transactions costs into account are necessary to evaluate the relationship between real interest rates. A semi-parametric, generalized additive vector autoregressive models were applied to a consideration of real interest rate linkages among the US, the UK, Japan, Switzerland and the Eurozone. Through nonlinearity tests, we find strong evidence that nonlinearities substantially characterize real interest rate linkages. Generalized impulse response functions are utilized to investigate the dynamics of real interest rates after shocks of different sizes, directions, and histories. All marginal effects from four models backed by different economic theories and generalized impulse responses from vector error correction models support the real interest rate parity hypothesis which indicates a high degree of integration in capital markets. The results provide evidence that the conventional tests which rely on linearity assumptions may lead to misleading inferences and local monetary policy makers can only affect the real interest rates when the international financial markets are close to the equilibrium; the efforts of the policy makers may be offset by the arbitrage behavior when this condition is not satisfied.

The Empirical Study of Interest Rate Pass-Through in Cambodia: An Error Correction Model

ABSTRACT The error correction model was used to explore the influence of domestic and international interest rates, proxied by the 6-Month and 1-Year SIBOR, on the borrowing interest rate of bank. The primary goal of this study was to determine the pass through from the predicted borrowing rate to the lending rate. The empirical findings of this study confirmed the existence of a long-run relationship between the borrowing rate and its explanatory variables, as evidenced by the two-step co-integration test. Domestic and foreign interest rates have a substantial long-run influence on the borrowing rate. Short-term borrowing rate changes were also impacted by changes in market interest rates and SIBOR rates. The predicted borrowing rate from co-integration equation had a positive significant impact on the lending rate claimed that there had a pass through from foreign to domestic lending rate. Keywords: ECM, Interest rate pass through, Borrowing rate, Market Rate, SIBOR.

Inflation Spill-overs from BRIC to SADC Economies: The Impossible Trinity Theory Analysis

This paper examined the potential inflation spill-over effects from BRIC to five SADC countries (Angola, Botswana, South Africa, Tanzania and Zambia) by using data collected for the period 1985-2020. Thirty-six (36) observations were used to obtain more reliable results with greater precision. Studies conducted on the impossible trinity argue that, in the case of highly financially integrated economies, domestic interest rates are tightly linked to the international interest rates if it is impossible to manipulate domestic interest rates. Specifically, interest rates for open economies tend to be influenced by international interest rates if these economies opt for free capital flows with a fixed exchange rate regime. Fisher's effect theory asserts that domestic interest rates trend positively with inflation rates. The principal method of research used is that of quantitative analysis. Given the empirical nature of the research, the paradigm employed is positivist. This paper employed the generalised method of moments (GMM) model, the Johansen cointegration procedure, and the Granger causality test in a vector error correction (VEC) model. The findings indicated that the fixed-exchange-rate regimes (soft pegs and hard pegs) are associated with high responsiveness of the domestic inflation rate to the foreign countries’ inflation rates, rather than to floating exchange-rate regimes (free-floating and managed floats). The policy implications for control of inflation in SADC economies are that, because of the financial market integration increase between SADC and BRIC economies, monetary authorities in SADC countries should consider floating exchange rate regimes (managed-floats or free-floating).

Investigation of the Role of Change in Utility Function Components and Its Effect on Smooth the Dynamic Movement Path of Model Variables

Abstract This paper attempts to present a model that can investigate and compare the effect of utility change on the dominant economy by defining different utility functions for households in which they perform to smooth their consumption paths in each period by using debt. To this end, this research with a glance at the existing economic literature will present a dynamic stochastic general equilibrium model for a small open economy for two countries in which, while diversifying the variables affecting the utility function, the government pays and finances its deficit despite the debt in Budget constraint. The results of the comparison of the two models indicate that in periods of low productivity, the country’s policy is to reduce or export debt which can minimize the consumption reduction. Also, despite the international interest rate in the model the consumption and capital accumulation are reduced to keep pace with the interest rate that the intensity of which depends on the utility function. Finally, it can be said that despite the different utility function, the investor diversifies his risk or his investment portfolio to escape the investment risk.

An Effectiveness Analysis of DR as the Benchmark Interest Rate in Money Market

The lack of capital market product pricing standards caused by the fading out of the old international benchmark interest rates, and the need for domestic interest rate market reforms and transformation of monetary policy frameworks require our country to establish and improve its benchmark interest rate system. In the construction of the benchmark interest rate system, DR interest rate is the top priority. This paper uses the relationship and market share of the three main interest rate types DR, FDR, and SHIBOR from 2017 to 2020 to conduct an empirical study to test the feasibility of DR as the benchmark interest rate of the money market. We found that the DR interest rate can better meet the benchmark interest rate standard in terms of market and fundamentals, but it needs further discussion in terms of robustness. However, it can be said that DR interest rate has passed the benchmark interest rate test and can be used as the benchmark interest rate in our country's money market.

‘Macro-finance determinants and the stock market development: evidence from Morocco’

ABSTRACT This paper focuses on the role of the macroeconomic outlook in explaining the returns volatility from 1998 to 2018 in Morocco. Our findings show that the inclusion of low-frequency macroeconomic information can improve the explaining ability, particularly for the long-term variance component. Information in some indicators which represent forward-looking variables (i.e. international economic situation, interest rates, exchange rates and inflation) seem to take into account the current economic situation, and remain useful in the Moroccan stock market development. Nevertheless, the historical realized volatility exceeds all models with macro-finance data in terms of explaining the long-term volatility. Therefore, it is noteworthy that investors and decision makers are considered to be more affected by the stock results, namely the past returns performance and the historical volatility. In general, modeling the long-term volatility component has a great potential and is very useful for portfolio selection, hedging decisions and macroeconomic risk management.

Dynamic linkages between US and Eurodollar interest rates: new evidence from causality in quantiles

Global markets have become more integrated, making co-movements of international interest rates possible. In this paper, we investigate the causal linkage between US and Eurodollar (London) interest rate using the Granger causality test in quantiles. This permits us to examine causality over interest rate distributions not covered by the usual causality test. We therefore test causality in different quantile ranges. A common attribute with previous studies that investigate the causal linkages among interest rates across international money markets is the assumption that the causal relations between international interest rate changes are constant across different interest rate levels. In this study, we allow for asymmetric quantile causal effects. Our empirical results suggest a quantile causal effect between US interest rate and Eurodollar interest rate. US interest rate Granger cause Eurodollar interest rate. The effect is positive at lower quantiles and negative at upper quantiles. On the other hand, Eurodollar interest rate Granger cause US interest rate, but the effect is negative at the lower quantile and positive at the upper quantile. The estimated causality coefficients at both the lower and the higher quantiles are significantly different from the median coefficients.

Unconventional Monetary Policy and International Interest Rate Spillovers

After the 2008 global financial crisis, advanced economies turned to unconventional monetary policies to provide additional monetary stimulus while short-term interest rates were constrained by their effective lower bound. However, the speed of economic recovery differed markedly among these economies, leading to differences in the timing and intensity of unconventional monetary policies across central banks. These differences may have generated “spillover effects” that undermined policy tightening in the United States after 2015. Karlye Dilts Stedman assesses whether monetary policies from the European Central Bank, the Bank of Japan, and the Bank of England affect U.S. borrowing costs at and away from the effective lower bound. She finds evidence of spillovers from each of these central banks to the United States as well as evidence that these spillovers increased during the asynchronous withdrawal from unconventional monetary policy. Her results suggest that in the absence of international spillovers, long-term yields in the United States would have been higher than those observed at the end of 2017.

Modelling short-run and long-run predictors of foreign portfolio investment volatility in low-income Southern African Development Community countries

Orientation: This study examined the main predictors of net foreign portfolio investment volatility in low-income Southern African Development Community (SADC) countries. Based on the World Bank data (July 2014), the selected countries are Zimbabwe, Zambia, Malawi, Lesotho, Madagascar, Mozambique, DRC, Swaziland and Tanzania. Research purpose: The purpose of this study is to establish the main drivers of net foreign portfolio investment volatility in low-income SADC countries. Motivation for the study: This study is also motivated by mixed findings in foreign portfolio investment debate on why capital flows are more volatile and difficult to manage in developing than in advanced economies. Although it is acknowledge that developing markets are characterised by the poor quality of financial institutions in economies with weak macroeconomic fundamentals, which ultimately pose a greater risk of sudden stops or reversal of foreign portfolio flows, findings remain inconclusive on what actually drives net foreign portfolio investment volatility in low-income countries. Research approach/design and method: The Panel Autoregressive Distributed Lag (P-ARDL) model is employed to determine the short- and long-run drivers of such investment volatility in these countries. The study uses quarterly data for the period spanning 2000 to 2015. Main findings: The findings reveal that all the variables in the model, namely money supply, world output, general prices, real gross domestic product, domestic interest rates and international interest rates, are significant predictors of net foreign portfolio investment volatility. However, positive long-run effects are observed from world gross domestic product, real gross domestic product, prices and money supply, whilst domestic interest rates and international interest rates displayed a negative association in the long run. These findings are consistent with both the economic literature and the empirical literature, which suggest that an increase in interest rates or higher interest rates affects foreign portfolio investment. Similarly, in the short run, all the variables employed in the model are the main predictors of net foreign portfolio investment volatility in low-income SADC countries. Practical/managerial implications: Policy-makers should embark on policies and programs that promote economic performance in order to attract stable foreign portfolio flows that will lead to stable markets and reduce volatility in the economy. Policy consistency is thus, recommended to attract investors to the region and ensure that stock and bond markets are viable and stable. Contribution/value-add: Unlike other existing studies, the measure of volatility employed in this is considered superior as it is based on net portfolio flows which reflect changes in an economy’s overall current account position. The study informs and advances the current discourse on the causes of capital flow volatility in the field of investment theory and practice.

Influencia del sector externo en la liquidez ecuatoriana, 2000-2016

The purpose of this paper is to study the influence of the representative variables of the external sector within the Ecuadorian liquidity, for the period dollarized between the years 2000 to 2016, specifically focusing on the variables European and American international interest rate, exchange rate, assets and exportations. In addition, this paper analyzed the impact of liquidity on the gross domestic product. As can be seen from the results obtained, the country is more vulnerable to different external shocks, mainly, it is more sensitive to the foreign interest rate. Keywords: External sector, liquidity, balance of payments, exchange rate, dollarization. URL: https://revistas.uta.edu.ec/erevista/index.php/bcoyu/article/view/919