Interest Rate Research Articles

Effectiveness of active labour market policies for job creation and earnings of the self-employed

Self-employed workers represent a significant share of the workforce in the main European countries. The recent COVID-19 crisis, followed by the conflict in Ukraine, has highlighted the unique challenges faced by this type of worker: income volatility, limited employment protection, and greater financial responsibility. In light of these challenges, it is essential to understand how active labour market policies influence their wage conditions (earnings) and ability to generate employment in order to ensure adequate employment protection and promote sustainable economic growth. This study analyses how the application of eight different policies affects self-employed people’s earnings and job creation, comparing participants and non-participants. Using an ad hoc survey, a random sample of 1265 self-employed people from the south of Spain was collected. The results of the propensity score matching method (PSM) and logistic regression models revealed that three types of ALMPs: free training programmes, low-interest loans, and the subsidy for hiring workers had a significant impact on job creation by the group of beneficiaries. Additionally, although training programmes and hiring subsidies showed positive effects on the average earnings of policy beneficiaries in the PSM analysis, these effects were not significantly verified when applying the logistic regression models. Despite the growing body of research that identifies the positive impacts of subsidies on self-employment outcomes, very little is known about the additional effects on earnings. We present the first estimation of the joint impact and provide policymakers with new evidence of the added value of training programmes and subsidies for hiring on earnings and job creation.

Interest rate regulation and bank lending behaviour: evidence from Kenya

Interest rate regulation and bank lending behaviour: evidence from Kenya

Interest rate and endogenous money under capital mobility and fixed exchange rate: alternative closures and implications

Interest rate and endogenous money under capital mobility and fixed exchange rate: alternative closures and implications

Two different eurozones: disentangling the labyrinth of the European economic dynamics

PurposeThis paper aims to analyze the possible interdependencies among fiscal, monetary and growth variables by applying multivariate Granger Causality and determining an ultimate “causality path” excluding redundant relationships based on a complex endogenous system for each country.Design/methodology/approachWe adopt a novel approach to test Granger Causality within the framework of Vector Autoregressive models. This approach enables us to expand the scope of relevant variables, which is typically limited to two or three, previously mentioned. Moreover, we employ graph-theoretic techniques for causal analysis, utilizing the PC algorithm (Colombo and Maathuis, 2014; Spirtes et al., 2000) to determine the optimal causal ordering among all statistically significant relationship.FindingsOur findings highlight the continued division between “core” and “peripheral” Euro area countries, with monetary policy variables playing a crucial role in the economic growth of “core” nations. Stable inflation contributes to sustained growth in these countries, while fiscal variables contribute to growth across most nations.Originality/valueThe literature concerning the relationship among different macroeconomic variables such as prices, output and monetary policy indicators such as interest rates and interest payments, may be incomplete or misguided due to the exclusion of relevant information because studies are mostly based on a bivariate or a trivariate framework dynamics. In this sense, one goal is the extension of the system, which may be crucial, because the omission of relevant variables may lead to biased results. Furthermore, we apply graph-theoretic methods for causal analysis by using the PC algorithm to determine the ultimate causal sequence among all possible ones and, finally, we aim to understand and disentangle the transmission process and the relationships among economic policies in a Euro area country-level analysis.

Foreign Investments and Market Capitalization in Nigeria: A VECM Analysis

A healthy capital market promotes the overall economic wellbeing of a country. However, Nigeria’s capital market has witnessed both internal and external pressures leading to high rate of volatility. This study examines the impact of foreign investments on market capitalization in Nigeria’s capital market for the period 1981 to 2022. The study is anchored on the theoretical framework of capital movement across regions and seeks to explain why investors invest in foreign countries and the impacts of such investments on the host country’s capital market. We adopted a vector error correction model (VECM) as our analytical tool. The ontrol variables: exchange rate, infrastructure, interest rate, and the target variables: foreign direct investment (FDI) and foreign portfolio investment (FPI) were regressed on market capitalization. Results indicate that FDI and FPI had positive and significant impact on market capitalization in Nigeria’s capital market and that FDI and market capitalization are the major contributors to the variations in market capitalization in Nigeria’s capital market. We conclude that FDI and FPI play important roles in Nigeria’s capital market performance and recommend incentives such as tax reduction and fee waivers which are capable of encouraging foreign enterprises listing. These will make Nigeria’s capital market globally attractive to foreign investors and hence ensure a continuous and impactful inflow.

Event‐Day Options

ABSTRACTThis paper considers new options on Treasury futures than expire each Wednesday and Friday. I examine the variances implied by these options as of the night before expiration, and compare the variances just before FOMC days and employment report days with the variances on other Tuesdays or Thursdays, respectively. This can be used to measure the risk‐neutral interest rate uncertainty associated with FOMC announcements and employment reports. I can also compare the average physical and risk‐neutral uncertainty. Lastly, I construct options‐implied densities on the eve of FOMC and employment report days.

The Role of Microfinance Institutions in Micro, Small and Medium Enterprises (MSMES): a Case Study of Budi Gadai

This study examines the role of microfinance institutions in supporting the development of Micro, Small, and Medium Enterprises (MSMEs), with a case study on Budi Gadai, located on Jalan Pancing. The objective of this research is to analyze how microfinance, particularly Budi Gadai, contributes to the growth and sustainability of MSMEs through accessible financing and financial management guidance. The research employs a qualitative approach with in-depth interviews and analysis of business performance data from MSME clients of Budi Gadai. The findings indicate that Budi Gadai provides a significant impact on MSME growth by offering simplified loan access, which helps business owners overcome financing barriers. The majority of MSMEs reported increased revenue and business expansion after obtaining funding from Budi Gadai. However, challenges remain, such as high interest rates and limited loan amounts. Nevertheless, Budi Gadai plays a critical role in the economic resilience of MSMEs, especially during periods of financial crisis. This study concludes that microfinance institutions like Budi Gadai are essential for the sustainability and growth of MSMEs, particularly in urban areas.

The Fed and the Secular Decline in Interest Rates

Abstract This paper documents a striking fact: a narrow window around Fed meetings captures the entire secular decline in U.S. Treasury yields. Yield movements outside this window are transitory and wash out over time. This is surprising because the forces behind the secular decline are thought to be independent of monetary policy. Long-term bond yields decline when the Fed cuts the short rate and when the Fed lowers its long-run forecast of the federal funds rate (the “dot plot”). These results are consistent with the view that Fed announcements provide guidance about the long-run path of interest rates. (JEL E43, E52, G12, G14)

Examining the Drivers and Economic and Social Impacts of Cryptocurrency Adoption

This study investigates the key drivers and the economic and social impacts of cryptocurrency adoption. Based on panel data across 37 countries from 2020 to 2023, this research examines the interplay between cryptocurrency adoption and technology development, monetary policies, and economic and social development. Employing a mixed-methods approach, the research incorporates panel data analysis across multiple countries to explore correlations and causal relationships between these variables. The study found that technology development, measured by the Network Readiness Index (NRI) enables cryptocurrency adoption. Economic conditions measured by higher national inflation rates and monetary policy indicators, including lower interest and exchange rates are the key drivers for cryptocurrency adoption. The empirical findings reveal that cryptocurrency adoption has negative relationships with economic development measured by the GDP growth rate, unemployment rate, and social development represented by the governance quality corruption index. It implies that cryptocurrency is used as a virtual anchor (digital gold) for national inflation. Findings reveal how network readiness, economic conditions, and monetary policies contribute to fostering cryptocurrency adoption, while resulting in impacts on economic growth, labour markets, and governance. The research contributes to the literature by integrating technological, economic, and governance perspectives to elucidate the role of cryptocurrency in reshaping the global economic and social systems.

Systemic risk under different clearing methods for multiple derivatives

ABSTRACT The superposition of credit and interest rate derivatives brings liquidity and benefits to financial markets but may shock the system. Various clearing methods, including bilateral and CCP clearing, have emerged since the proposal of a mandatory clearing system. Previous research has focused on single derivatives, neglecting multiple derivatives. Thus, this paper constructs a banking network model incorporating two derivatives and investigates the banking systemic risk under two clearing methods: joint clearing in the same CCP and separate clearing in different CCPs. Results show that the systemic risk of joint clearing in the same CCP is lower than that of separate clearing in different CCPs. Increasing the central clearing ratio increases the systemic risk under separate clearing in different CCPs. The systemic risk is low when the central clearing ratios for credit derivatives and interest rate derivatives are similar under joint clearing in the same CCP approach. In addition, the systemic risk can be significantly underestimated by studying only one type of derivatives in the banking network. This paper not only provides theoretical support for the banking systemic risk under multiple derivatives clearing issues, but also offers strategic suggestions for regulators to clear derivatives reasonably and effectively.

The EU Taxonomy and the Syndicated Loan Market

Abstract The European Union (EU) Taxonomy on Sustainable Activities is one of the most far-reaching financial market regulations to combat climate change. Using international data from the syndicated loan market, we demonstrate that firms with larger EU Taxonomy-eligible revenue shares paid lower interest rates in the years before the formal introduction of the Taxonomy. Business revenue is Taxonomy-eligible if it originates from “transitional activities” that substantially contribute to climate change mitigation. A one-standard-deviation increase in firm revenue from transitional activities is associated with 5 basis points (bp) lower loan spreads (5% relative to the standard deviation). Effects are more pronounced for firms in countries with greater climate risk exposure and more stringent environmental policies, and when lending institutions have green preferences. The effects of transitional revenue do not simply reflect a borrower’s ESG ratings or broad exposure to climate risks and opportunities. Overall, our results indicate that financial markets already priced in some of the intended effects of the Taxonomy.

Inflation-driven Economy Policy in the Light of the Exchange Rate and the Interest Rate on RGDP in Turkey

This study investigates the reflections on the trio of exchange rate, nominal interest rate and inflation, on Turkey’s Real Gross Domestic Product (RGDP). In the analysis using annual time series data covering the years 1985–2020 obtained from the Turkish Statistical Institute, the Vector Autoregression (VAR) and Nonlinear Autoregressive Distribution Lag (NARDL) models are used with restricted variables. The existence of cointegration also encourages the application of the Vector Error Correction (VECM) model to examine the causal relationships between these variables. Nonlinear ARDL test results and other tests reveal some long-term effects. Research results show that inflation-based growth does not occur in the short term and negatively affects growth in the long term. Due to Turkey’s significant current account deficit and heavy reliance on imported energy and inputs, currency devaluation is ineffective in boosting exports, highlighting the challenges of promoting export growth under these economic conditions. Moreover, it turns out that policies that reduce interest rates, as well as the depreciation of the Turkish lira against the exchange rate due to inflation, harm the economy in general. These effects serve as a crucial wake-up call for proponents of the export-led growth model.

Bonos verdes para financiar la inversión socialmente responsable: un análisis bibliométrico

Sustainable finance has grown in importance in recent years due to its close relationship with sustainable development and the estimated large investment needs. After a long period of near-zero interest rates, we have witnessed a change in the scenario in the last two years, so it is important to know how this may affect the transition to a sustainable economy. To approach this object of study and contextualize it, a bibliometric analysis is carried out, using the Web of Science database, on: sustainable finance, Socially Responsible Investment and green bonds. The evolution of publications, the most active countries, the most relevant institutions and authors, the most researched topics, the most cited articles and the relationship of these three areas with the Sustainable Development Goals have been analyzed, in order to try to detect trends, omissions and research opportunities. The analysis reveals that sustainable finance is highly associated with climate aspects and green bonds, that the performance of green bond portfolios and other sustainable financial assets is a widely researched issue, and that the European Union is very active in knowledge generation, also having a long history in this object of study, supported by both the regulatory and institutional framework, and driven by the European Green Deal presented by the European Commission in 2019 and the Action Plan against Climate Change of the European Central Bank in 2021.

A wavelet analysis of monetary policy transmission channels in Morocco

PurposeThis paper examines the effects of monetary policy and the interdependencies between the real economy, the financial sector and monetary variables.Design/methodology/approachThe authors employ the continuous wavelet transform to examine how the relationship between the variables in question evolves over time and across various frequencies.FindingsThe results underscore the ineffectiveness of the exchange rate channel. Despite monetary policy consistently leading long-term interest rates, its limited impact on investment suggests the interest rate channel may be less operational. Conversely, the study presents evidence supporting the credit channel’s effectiveness, not only in low market volatility but also during economic downturns. Finally, the examination of the asset prices channel uncovers that the stock market was influenced by monetary policy during its brisk ascent, while real estate led monetary policy.Practical implicationsThe study yields several practical implications. It emphasizes employing advanced mathematical methods to capture the dynamic relationships between monetary policy and economic variables. It highlights the importance of a resilient banking sector given its significant role in the economic advancement of the country. It underscores the need to develop a more inclusive and dynamic financial system and diversify funding alternatives for the private sector to make asset prices a pivotal channel for achieving monetary policy objectives. And with Morocco’s transition to an inflation targeting framework and a flexible exchange rate regime, assessing the effectiveness of the interest rate and exchange rate channels becomes crucial. While the innovative use of wavelet coherence methodology sets a precedent for evaluating monetary policy transmission channels in developing countries, urging researchers and policymakers to explore novel quantitative approaches.Originality/valueThis article stands out as one of the few to employ the wavelet coherence methodology to investigate monetary policy transmission across multiple channels, specifically within the context of a developing country.

Economy and Interest: A New Presentation of the Fundamental Problems Related to the Economic Role of the Rate of Interest and Their Solutions, by MauriceAllais (University of Chicago Press, Chicago, IL, 2015), pp. 632

Economy and Interest: A New Presentation of the Fundamental Problems Related to the Economic Role of the Rate of Interest and Their Solutions, by MauriceAllais (University of Chicago Press, Chicago, IL, 2015), pp. 632

Exchange Rates, Uncovered Interest Parity, and Time‐Varying Fama Regressions

ABSTRACTThis paper studies the forward premium puzzle, which signals a violation of the uncovered interest parity (UIP) hypothesis. We test this hypothesis with Fama‐style regressions with time‐varying parameters (TVPs) and stochastic volatility (SV) on six major currencies relative to the US dollar on monthly samples from 1993 to 2018. TVP‐SV regressions are also employed to examine the opposing predictions of the forward premium and excess volatility puzzles often found in exchange rate risk premiums and interest rate differentials. Using Bayesian methods, we document that the riskiness of exchange rates explains the forward premium puzzle, while a liquidity premium reconciles the contrasting predictions of the forward premium and excess volatility puzzles.

Estimation and specification test for diffusion models with stochastic volatility

Given the importance of continuous-time stochastic volatility models to describe the dynamics of interest rates, we propose a goodness-of-fit test for the parametric form of the drift and diffusion functions, based on a marked empirical process of the residuals built with an adapted Kalman Filter estimation. The test statistics are constructed using a continuous functional (Kolmogorov–Smirnov and Crámer–von Mises) over the empirical processes. Both, the different estimation procedures (including other alternatives as for example methods based on Markov Chain Monte Carlo or Particle filters) and the new proposed tests are compared in different simulation studies. The tests are calibrated with a specific bootstrap method using the estimation of a discrete version of the diffusion model with stochastic volatility. Finally, an application of the procedures to real data is provided.

Challenges For ECB Communication Policies

<p>This paper discusses two challenges for the European Central Bank (ECB) communication policies, namely how to communicate with financial markets during and after the ‘normalisation’ of its monetary policy, and how to communicate with the general public in order to increase trust in the central bank. </p><p>Traditionally, central bank communication was directed towards financial market participants. By communicating its future policy intentions (forward guidance), a central bank can tighten the gears between the short-term policy rate that it controls and the interest rates that influence economic behavior. We discuss how effective the ECB’s forward guidance has been, also addressing whether its forward guidance constrained the central bank in deciding to terminate asset purchases and raise policy rates after inflation had increased above target. We conclude that its current meeting-by-meeting and data-driven approach might be a suitable approach to communicate with financial markets provided ECB officials stop providing (conflicting) hints about future interest rate decisions.</p><p>To ensure a modicum of democratic accountability, central banks must also communicate with the general public. No doubt, the biggest challenge in communicating with the broad public is that they are not really interested. This makes it very hard to use communication policies to increase trust in the ECB. Trust is important as research suggests that inflation expectations of individuals who trust central banks tend to be closer to the central bank’s inflation target. Probably the best way to regain trust is to bring inflation back to target. </p>

EXPRESS: Investor Learning in Crowdfunded Supply Chain Finance Markets

Crowdfunded Supply Chain Finance (SCF) represents a novel market design that transforms financial flows within the SCF paradigm. It enables crowd investors to serve as financers, lending vital working capital to suppliers facing liquidity problems. A distinctive feature of this market is the mandatory involvement of loan guarantors, which facilitates repeated interactions between investors and fundraisers, potentially fostering investor learning. To understand how such learning dynamics shape investor decision-making, we develop a Bayesian learning model that conceptualizes investor perceptions of guarantor reliability as a subjective attitude underlying the perceived risk of a loan listing. The model posits that investors can learn about a guarantor’s reliability through a series of scheduled repayments involving the same guarantor over time. We consider investor decision-making a joint process comprising two interdependent components: (1) the incidence decision of whether to invest and (2) the amount decision of how much to invest. Our results reveal that investor perceptions of guarantor reliability play a crucial role in shaping both decisions, albeit in distinct ways. While perceived reliability exerts a positive, monotonic effect on amount decisions, its impact on incidence decisions follows an inverted U-shaped pattern. Furthermore, perceived reliability attenuates the positive effect of loan interest rates on both decisions, suggesting that the appeal of higher returns diminishes as investors’ reliability perceptions increase. A posterior analysis further shows that offering high interest rates may become counterproductive when perceived reliability is sufficiently high. These findings provide actionable implications for platform designers and participants in crowdfunded SCF markets.

Navigating Financial Barriers: Examining Agricultural Credit Accessibility for Smallholder Paddy Farmers in Mvomero District, Tanzania

Access to agricultural credit is critical for the economic sustainability of smallholder farmers, particularly in developing regions like Tanzania. However, many smallholder paddy farmers in Mvomero District face significant barriers when trying to secure financing essential for improving productivity and livelihoods. This study investigates the enablers and obstacles influencing agricultural credit accessibility for these farmers. Using a mixed-methods approach, data were collected from 274 farmers and key informants, revealing that prior loan experience plays a significant role in facilitating credit access, with 80.7% of respondents indicating previous loan engagement. Additionally, secure land ownership was found to correlate with better credit terms, as those with formal titles reported a mean score of 3.12, highlighting the importance of land tenure in their borrowing experience. Despite the high level of engagement with credit markets, considerable challenges remain, with mean scores of 2.98 and 3.14 suggesting that interest rates and collateral requirements are perceived as substantial barriers to accessing credit. Furthermore, trust and reputation emerged as pivotal factors in loan procurement, with 73% of farmers expressing willingness to seek additional credit, which reflects a generally positive outlook on borrowing. These findings underscore the urgent need for tailored financial education programmes and supportive policies aimed at enhancing lending practices and improving access to capital for smallholder farmers in the region.