Key Interest Rate Research Articles

Эконометрическая оценка влияния монетарной политики на динамику российского фондового рынка

The article provides the analysis of the impact of monetary policy shock generated by the Bank of Russia on the Russian stock market yield dynamics. We have estimated the features and duration of the effect using SVAR models and monthly data for the period from 2005 to 2013. We examine a wide range of proxies for the monetary conditions: the key interest rate, monetary aggregate M2, the refinancing rate and the interbank lending rate.

ECB policy responses between 2007 and 2014: A chronological analysis and an assessment of their effects

The paper analyses the monetary policy responses of the European Central Bank (ECB) to the global financial crisis and the European sovereign debt crisis. Our goals are on the one hand to explain chronologically the main measures in conventional and unconventional policies adopted by the ECB and on the other hand to analyse their effects on key interest rates, monetary aggregates and the money multiplier. The assessment is that the ECB?s monetary policy responses to the crisis have been ?too little, too late?, constrained by the institutional framework, which prevents the ECB from acting as a true central bank with the role of lender of last resort.

Consequences of divergent monetary policies of the highly industrialised countries on global and local level

In contrast to the USA, negative interest rates in the Eurozone and other European countries, as a result of unprecedented expansionary monetary policy implemented by the European Central Bank since 2014, will have far-reaching negative consequences. Decisions of citizens to withdraw deposits from banks and keep them in safe deposit boxes, invest in real estate and land, and decisions of companies to hold large amounts of cash or to buy-back shares and close up, under conditions of divergent policies of central banks in highly industrialized countries, indicates the presence of risk of secular stagnation. Faster recovery of the USA economy and normalization of FED monetary policy through the cycle of increasing the key interest rate will contribute to further strengthening of the US dollar against the euro. It will significantly increase the burden of foreign debt servicing for highly indebted countries that have borrowed in US dollars. This is the case with Serbia. Continuation of ECB expansionary monetary policy would have a positive impact on real GDP growth in Serbia in 2017. Close to zero interest rates on the savings of citizens in Eurozone would negatively influence its future economic growth. Negative effects of such a policy will also be manifested in Serbia because the interest rates on savings in banks are also close to zero.

Estimating Taylor Type Rule for India's Monetary Policy using ARDL Approach to Co-integration

In an open economic environment, economies generally experienced economic instability emerging out of internal and external factors. Like other central banks ’apparently following discretionary policy rule corresponding to fluctuations in the economy, Reserve Bank of India has also been not less than anyone in responding frequently to different economic situations by changing key interest rates those it has under its privilege. Using Autoregressive Distributed Lag (ARDL) model of co-integration, this paper decisively estimates exchange rate augmented Taylor Type rule for India's monetary policy and examined its short-run and long-run behaviour with respect to the output gap, inflation gap and exchange rate over the period from 2001Q1 to 2012Q4. Estimation results revealed that output gap, inflation gap and exchange rate are the important determinants of monetary policy in India. Amongst these three, inflation and output gap found to be matter more for RBI than exchange rate in short-run, but the situation is vice-versa in long-run. The study also asserts that Exchange Rate Augmented Taylor Type rule sufficiently explains the behaviour of RBI's monetary policy.

Arguments for the Ruble Exchange Rate Management

The paper discusses the target guides and the Bank of Russia’s monetary policy operational instruments. Events of 2014-2015 showed that the inflation targeting regime is not an effective target guide of the Bank of Russia’s monetary policy. The key interest rate fails to reflect the proper price of holding and using of financial resources of households, financial and non-financial organizations. The floating exchange rate regime has not become an automatic mechanism of external shocks absorption, but intensifies the exchange rate volatility instead. The exchange rate management is the only effective regime for the current Bank of Russia’s monetary policy.

Global Financial Market Turbulence: Factors and Risks

In the last few months, the global economy has been faced with growing risks primarily emanating from the state of the world’s two largest economies and their policies. One of the main factors behind the current turbulence in global financial markets is the destabilizing expectation that the US Federal Reserve is going to toughen its policy stance. The ongoing decline in unemployment and the steady rebound in business activity have created preconditions for a rise in the US Federal Reserve’s key interest rate. As far as the developing economies are concerned, the most likely result of this decision will be an increase in the rate of capital outflow and a new wave of currency depreciations. The second and maybe even more important factor is China’s continuing deceleration in economic growth, the collapse of its stock market and the unexpected devaluation of the Yuan.

Inflation and Monetary Policy in Russia in September 2015

Due to the turmoil in the foreign exchange market, the Bank of Russia lifted on the 16th of December the key interest rate up to 17% p.a. in an effort to stop the ruble’s rapid depreciation. In December 2014, the consumer price index stood at 2.6% (0.5% in December 2013 ), up 1.3 p.p. above the value seen in November. As a result, inflation went up to 11.4% on an annualized basis. The consumer price index reached 1.5% within the first 19 days in January 2015.

Modernization of Institutional Environment of Entrepreneurship in Russia for Development of Innovation Initiative in Small Business Structures

1. Introduction Small business structures in economic process of reproduction are one of the main elements of sustainable innovational development, as they are the most dynamic and ensure national competitiveness and economic growth in long-term perspective. Substantiation of the main role of small business structures in the developed and developing countries is obvious, as they are the ones that create around 80% of jobs, and their contribution into formation of GDP constitutes 50%-80% (Report, 2015). Besides, their significance in development of new technologies is obvious--due to economic and social specifics and business qualities. Modern unstable state of the system of small business in Russia is caused primarily by imperfection of mechanisms of its development management. In particular, there is no system of cooperation of small business structures with subjects of large and medium business, due to which small innovational enterprises exist separately from enterprises of large and medium business--though the technologies they create are aimed for implementation in their production. At present, Russian economy goes through the period of adaptation to new socio-economic conditions of functioning and realia of current processes of globalization of the world economy; moreover, these conditions can significantly change under the influence of many external economic and political forces. Modern Russia faces serious economic conditions: ruble depreciation, the Central Bank key interest rate, economic sanctions, and limited access to foreign markets of loans and credits, which is a serious challenge for various types of modern business structures in Russia. Results of the conducted research of subjects of small and medium business show that most of existing small enterprises--legal entities (85.9%)--are micro-companies with up to 15 employees. These small companies provide a third part of jobs and 43% of revenue of the sector of small and medium business. Sectorial structure of the sector of small and medium business, as of year-end 2014, consists in the following: most of small and medium enterprises are involved in trade, transport vehicles service, and household goods service (38%), operations in the sphere of real estate and services (21%), construction (11%), minerals extraction, production and distribution of electrical energy, gas, and water (11%). Individual entrepreneurs work primarily in the sphere of trade, transport vehicles service and household goods service, service sphere, and agriculture. More than half of individual entrepreneurs (53%) are involved in wholesale and retail, transport vehicles service and household goods service, 11%--transport, 11%--real estate operations and service sphere, and 7%--agriculture and forestry. Recently, there has appeared a lot of enterprises which conduct their activities in the sphere of R&D work and production of high-tech and science-intensive products, but still priority in small business remains with companies of trade and service sphere--25%, real estate operations--21%, production and distribution of utilities (water, gas, electricity), minerals extraction--19%, construction companies, agricultural enterprises--7% (Federal State Statistics Service, 2014). This statistics shows that development of small business structures in Russia is peculiar for their low inclination for innovations, while there are a lot of small companies in innovational sector in the world. Modern tendencies of development of innovational activities of small business structures in the Russian economy do not fully correspond to expectations which would stipulate the formation of economy of innovational type, absence of tools and institutions of support which provide and stimulate innovational development of small business, imperfection of state regulation and management--all of this shows the necessity for creation of reliable institutional basis (order) of business environment, aggregated with changes in economy, based on leading regional and international experience. …

Testing Information Diffusion in the Decentralized Unsecured Market for Euro Funds

Average rates in the decentralized unsecured market for euro funds, like the EONIA for the overnight maturity, are fundamental indicators of the smooth transmission of the signal rate by the central bank. Public information plays an important role in this context, as key interest rates are set by the central bank and average market rates are published daily, constituting common knowledge. Nevertheless, according to the theoretical literature on over-the-counter markets, private information may have an important role in a decentralized market. The diffusion of private information can generate prices that depend on the decentralized market structure. This is the first paper to use an ad hoc (network) version of the spatial autoregressive model to assess the presence of this mechanism. I propose a simple methodology to test whether the joint distribution of rates depends on the interbank network structure and to estimate information diffusion strength. The method is applied to a unique dataset collecting unsecured interbank loans and characteristics of banks operating in European central bank money. A wide time span including sovereign debt crises in the euro area is considered. I find that information diffusion played a greater role during periods dominated by strong uncertainty.

The Quantitative Easing of the ECB and the Decision of the Swiss National Bank for a Free CHF in January 2015: A Joint Analysis

Consumer prices in the Eurozone have just been announced: -0.6% for January 2015. In an effort to bring inflation back closer to the ECB’s target level at just below 2%, EU Justice Court lawyers approved on January 14th 2015 a bond-buying program, which was announced a week later, January 22th 2015, by its Director Mario Draghi. Fallouts came subsequently across Europe, impacting monetary policies of several countries, especially Switzerland. The Swiss National Bank (SNB) decided not to support any more the Swiss franc (CHF) on the market, ending the 1.20 CHF/EUR fixed parity introduced in September 2011 and cut its key interest rate from -0.25% to -0.75%.

Russia's Inflation and Monetary Policy in May 2015

Further stabilization of inflation and the ruble exchange rate allowed the Bank of Russia Board of Directors to further cut the key interest rate to 11.50% p.a. on 15 June 2015. The cut was triggered by the fact that Russia’s economy was still facing serious risks of a downturn amid weakening inflation risks. The Bank of Russia announced on 14 May that it will resume its interventions to buy foreign exchange, $100m to $200m on a daily basis, in order to increase the international reserves. In May 2015, consumer prices increased 0.4% (0.9% in May 2014), i.e. down 0.1 p.p. from April 2015. As a result, inflation in May 2015 stood at 15.8% compared to May 2014. The Consumer Price Index increased 0.2% in the first 22 days of June 2015, showing a substantial slowdown.

Inflation and Monetary Policy in March 2015

Due to a shift in the balance of risks towards a more significant cooling of the economy, at the Bank of Russia Board of Directors’ meeting on 13 March 2015 it was decided that the key interest rate should be reduced by 1 p.p. – to 14% per annum. In March 2015, the Consumer Price Index’s growth amounted to 1.2% (vs. 1.0% in March 2014), which is 1 p.p. below its value recorded in February 2015. As a result, the inflation index increased in March 2015 on March 2014 by 16.9%. Over the first 20 days of April 2015, the Consumer Price Index’s growth amounted to 0.5%.

Inflation and Monetary Policy in February

Due to the fact that the balance of risks has moved towards a substantial cooling down of the economy, the Bank of Russia Board of Directors decided at its regular meeting on 13 March 2015 to lower by 1 p.p. the key interest rate to 14% p.a. In February 2015, the Consumer Price Index stood at 2.2% (0.7% in February 2014), i.e., making it 1.7 p.p. below the value seen in January 2015. As a result, inflation increased to 16.7% year-over-year in February 2015. The CPI reached 0.7%. in the first 23 days of March 2015.

Inflation and Monetary Policy in November 2014

In November 2014, the Consumer Price Index (CPI) amounted to 1.3% (vs. 0.6% in November 2013), which is 0.5 p.p. above its value recorded in October. In response to the mounting panic in the foreign exchange market, from 16 December the Bank of Russia raised its key interest rate to 17% per annum in an attempt to curb the ruble’s rapid depreciation. In November, the inflation rate in the Russian Federation was once again on the rise: the Consumer Price Index (CPI), as seen by the month-end results, amounted to 1.3% (vs. 0.8% in October 2014), which is 0.7 p.p. above the same index for 2013. As a result, the inflation rate in per annum terms climbed to 9.1% (Fig. 1). The core inflation rate1 in November 2014 was 1.0%, which is below its index for the same period of last year by 0.5 p.p.

Breaking Through the Zero Lower Bound

There has been much discussion about eliminating the “zero lower bound” by eliminating paper currency. But such a radical and difficult approach as eliminating paper currency is not necessary. Much as during the Great Depression—when countries were able to revive their economies by going off the gold standard—all that is needed to empower monetary policy to cut interest rates as much as needed for economic stimulus now is to change from a paper standard to an electronic money standard, and to be willing to have paper currency go away from par. This paper develops the idea further and shows how such a mechanism can be implemented in a minimalist way by using a time-varying paper currency deposit fee between private banks and the central bank. This allows the central bank to create a crawling-peg exchange rate between paper currency and electronic money; the paper currency interest rate can be either lowered below zero or raised above zero. Such an ability to vary the paper currency interest rate along with other key interest rates, makes it possible to stimulate investment and net exports as much as needed to revive the economy, even when inflation, interest rates, and economic activity are quite low, as they are currently in many countries. The paper also examines different options available to the central bank to return to par when negative interest rates are no longer needed, and the associated implications for the financial sector and debt contracts. Finally, the paper discusses various legal, political, and economic challenges of putting in place such a framework and how policymakers could address them.

Breaking Through the Zero Lower Bound

There has been much discussion about eliminating the 'zero lower bound' by eliminating paper currency. But such a radical and difficult approach as eliminating paper currency is not necessary. Much as during the Great Depression-when countries were able to revive their economies by going off the gold standard-all that is needed to empower monetary policy to cut interest rates as much as needed for economic stimulus now is to change from a paper standard to an electronic money standard, and to be willing to have paper currency go away from par. This paper develops the idea further and shows how such a mechanism can be implemented in a minimalist way by using a time-varying paper currency deposit fee between private banks and the central bank. This allows the central bank to create a crawling-peg exchange rate between paper currency and electronic money; the paper currency interest rate can be either lowered below zero or raised above zero. Such an ability to vary the paper currency interest rate along with other key interest rates, makes it possible to stimulate investment and net exports as much as needed to revive the economy, even when inflation, interest rates,and economic activity are quite low, as they are currently in many countries. The paper also examines different options available to the central bank to return to par when negative interest rates are no longer needed, and the associated implications for the financial sector and debt contracts. Finally, the paper discusses various legal, political, and economic challenges of putting in place such a framework and how policymakers could address them.

Estimation of transmission mechanism of monetary policy in Serbia

Transmission mechanism of monetary policy recently has been subject to several studies in Serbia. The so called 'black box' of monetary policy is investigated with aim to identify the effects of transmission channel in environment where exchange rate has a dominant role in central bank operations. Therefore, it is a challenge to approach this problem in inflation targeting regime where key interest rate is expected to prevail as a main policy instrument. The study employs unrestricted Vector Autoregression model for estimating significance of exchange rate and interest rate channel. As expected, exchange rate has far more stronger influence on inflation, even though there are some signs of interest rate channel existence. Introducing Euribor as endogenous variables in VAR system displayed important impact on real variables.

Russia's Inflation and Monetary Policy in June 2015

Further stabilization of inflation and the ruble exchange rate allowed the Bank of Russia Board of Directors to further cut the key interest rate to 11.50% p.a. on 15 June 2015. The cut was triggered by the fact that Russia’s economy was still facing serious risks of a downturn amid weakening inflation risks. The Bank of Russia announced on 14 May that it will resume its interventions to buy foreign exchange, $100m to $200m on a daily basis, in order to increase the international reserves. In May 2015, consumer prices increased 0.4% (0.9% in May 2014), i.e. down 0.1 p.p. from April 2015. As a result, inflation in May 2015 stood at 15.8% compared to May 2014. The Consumer Price Index increased 0.2% in the fi rst 22 days of June 2015, showing a substantial slowdown.

Interest rates and structural shocks in European transition economies

European transition economies are still suffering from negative implications of economic crisis. Significant decrease in the key interest rates was followed by reduced maneuverability of central banks in providing incentives into real economies. Low interest rate environment together with effects of quantitative easing induced economists to examine sources of interest rates volatility. Responsiveness of short-term interest rates to the structural shocks provides unique platform to investigate sources of their unexpected volatility and associated effects on monetary policy decision making. Moreover, sources of interest rates volatility may help to reveal side effects of the exchange rate regime choice. Empirical investigation of interest rates determination under different exchange rate regimes highlights substantial implications of relative exchange rate diversity and its importance during the crisis period. In the paper we analyze sources of the short-term nominal interest rates volatility in ten European transition economies by employing SVAR methodology. We observed unique patterns of the short-term interest rates responsiveness in countries with different exchange rate arrangements that contributes to the fixed versus flexible exchange rate dilemma.

Inflation and Monetary Policy in June 2014

In June 2014, the consumer price index stood at 0.6% (0.4% in June 2013), 0.3 p.p slightly below the value observed in May 2014. Therefore, inflation stood at 7.8% at the end of the 12-month period. The consumer price index reached 0.5% within 21 days in July 2014. As of July 1, 2014, banks’ debt owed to the regulator amounted to Rb 5,4 trillion. On July 25, 2014, the Bank of Russia kept tightening the monetary policy, litiing the key interest rate from 7.5% to 8% p.a.