Low Long-term Interest Rates Research Articles

Análisis económico del derecho de las medidas no-convencionales del Banco Central Europeo

This study delves into the significance and effectiveness of unconventional monetary policy measures adopted by central banks within the current economic policy framework. These measures are employed when conventional tools prove inefficient in stimulating or stabilizing the economy, influencing interest rates, inflation, and economic activity. The hypothesis will be tested through quantitative analysis, encompassing macroeconomic data and time series analysis, and examining various economic schools and theories. Additionally, potential long-term problems associated with these measures will be explored. The expected conclusions of this analysis aim to demonstrate that unconventional measures implemented by central banks have the potential to significantly impact the economy, particularly during economic crises. It is anticipated that “Quantitative Easing” will provide increased liquidity to the financial system and lower long-term interest rates. Furthermore, the study will assess potential side effects, such as income inequality, financial risks, price distortions, or the formation of asset bubbles. This research underscores the critical importance of unconventional monetary policies in contemporary economic discourse while scrutinizing their long-term implications.

Performance of Value and Growth Stocks in the Aftermath of the Global Financial Crisis

Abstract Background: Due to strong empirical evidence from different markets, existence of value premium became a financial theory standpoint. Although previous studies found that value stocks beat growth stocks in bearish and bullish markets, during the GFC, value stocks underperformed growth stocks. Objectives: This paper aims to examine the performance of value and growth stock portfolios after the GFC. Subjects of our analysis are constituent companies of the DJIA index, out of which portfolios of large-cap value and growth stocks have been constructed and evaluated. Methods/Approach: We measure the performance of stock portfolios, which are created based on the naïve diversification rule and random weighting approach. Statistical testing includes Levene’s homogeneity test, the Mann-Whitney U test, T-test, and the One-Sample T-test. Results: Growth stock portfolios outperform value stock portfolios after the GFC. The dominance of growth stock portfolios compared to value stock portfolios is significant, and the value premium disappears. Conclusions: Financial theory and investment management implications show that growth stocks have overtaken the dominance over value stocks since 2009. Causes might be in (1) expansionary monetary policy characterized by very low long-term interest rates and (2) high performance of the tech industry to which most growth stocks belong.

What Do Interest Rates Reveal About the Stock Market? A Noisy Rational Expectations Model of Stock and Bond Markets

We propose a novel theory and provide supporting empirical evidence that lower long-term interest rates (e.g., because of ``quantitative easing'') harm informational and allocative efficiency. We develop a noisy rational expectations equilibrium model with an endogenous interest rate that investors use to update their beliefs about economic fundamentals. The interest rate reveals information about discount rates, allowing investors to extract more information about cashflows from stock prices. The precision of the interest-rate signal and, hence, stock-price informativeness increase in the interest rate. As a result, informational and allocative efficiency rise with bond and money supplies and with policy transparency.

The global saving glut and the fall in U.S. real interest rates: A 15-year retrospective

The authors revisit Ben Bernanke’s global saving glut (GSG) hypothesis from 2005—which links low long-term real interest rates in the United States to excess saving in a number of non-Western countries, including, but not limited to, China. Using an analytical framework and empirical data, they find that the ability of the GSG hypothesis to explain the fall in long-term real rates between 2002 and 2006 is likely much greater than its ability to account for the further fall in these rates from the Great Recession onward.

Accounting for Low Long-Term Interest Rates: Evidence from Canada

In recent decades, long-term interest rates around the world have fallen to historic lows. We examine this decline using a dynamic term structure model of Canadian nominal and real yields with adjustments for term, liquidity, and inflation risk premiums. Canada provides a useful case study that has been little examined despite its established indexed debt market, negligible distortions from monetary quantitative easing or the zero lower bound, and no sovereign credit risk. We find that since 2000, the steady-state real interest rate has fallen by more than 2 percentage points, long-term inflation expectations have edged down, and real bond and inflation risk premiums have fluctuated but shown little longer-run trend. Therefore, the drop in the equilibrium real rate appears largely to account for the lower new normal in interest rates.

Unconventional monetary policy and negative interest rates: a Post-Keynesian perspective on the liquidity trap and euthanasia of the rentier*

This article discusses ‘unconventional’ monetary policy after the 2008 crisis. The focus is the original theoretical basis for such policy and possible Keynesian readings and criticisms. Drawing inspiration mainly from Keynes (1930; 1936) and Minsky (1975), the paper seeks to explain why ultra-low/negative interest rates neither caused ‘rentiers’ to die, nor achieved full employment. The main hypothesis goes in the direction pointed to by Keynes: the problem is the low marginal efficiency of capital, the liquidity trap, and the lack of active government fiscal policy, which should be used in conjunction with monetary policy that maintains low long-term interest rates in order to spur investment. Monetary policy and very low/negative interest rates seem insufficient to overcome low growth. They are also incapable, at least in the short term, of promoting euthanasia of the rentiers as current monetary policy allows financial institutions to benefit from the capital gains it spurs.

Savings and Liquidity Gluts and the American Long-Term Interest Rates Before the Great Financial Crisis

Objectives: This article examines the impact of the global savings glut on the long-term interest rates in the United States before the Great Financial Crisis. It presents the impact mechanics of global savings on interest rates, discusses arguments supporting and contradicting the significance of this phenomenon, presents an alternative concept, namely global liquidity glut, and estimates the significance of both phenomena in shaping long-term interest rates in the USA before the crisis. Research Design & Methods: First, the impact of purchases of the US treasury bonds made by foreign investors on long-term interest rates is being assessed. Second, metrics representing global savings and liquidity gluts are being used to explain those purchases. Finally, a counterfactual exercise is used to reveal the impact that each of those factors had on the American ten-year treasury yields. Findings: The statistical analysis of both effects shows that foreign purchases of the Treasuries lowered the US longterm interest rates by up to 140 bps, with excess global savings depressing them by approximately 45 bps, and excess liquidity by another 75 bps. Implications / Recommendations: Monetary policy, as well as savings rates, might have wider than only local consequences. Excess liquidity and savings in one country can impact interest rates in other areas. Contribution / Value Added: This article presents an alternative and neglected in literature explanation for the phenomena of low long-term interest rates before the Great Financial Crisis in the USA, namely global liquidity glut that depressed interest rates more powerfully than excessive global savings, contributing to the development of the investment bubble on the housing market and, thus, the Great Financial Crisis.

How to choose between fixed- and variable-rate loans

The current low-interest-rate landscape influences the decision whether to secure these low long-term interest rates with a fixed-rate agreement or to benefit from the current negative short-term rates with a variable-rate loan. The decision is based on expected future interest rates. We propose two criteria, namely the effective interest rate and the total repayments which serve as an approximation, to decide what type of loan is more advantageous. In this context, we also present the effects of varying future interest rates on the three selected repayment agreements; i.e. lump sum, constant principal and annuity repayments.

How to Choose Between Fixed and Variable Rate Loans

The current low-interest-rate landscape influences the decision whether to secure these low long-term interest rates with a fixed-rate agreement or to benefit from the current negative short-term rates with a variable-rate loan. The decision is based on expected future interest rates. We propose two criteria, namely the effective interest rate and the total repayments which serve as an approximation, to decide what type of loan is more advantageous. In this context, we also present the effects of varying future interest rates on the three selected repayment agreements; i.e. lump sum, constant principal and annuity repayments.

Safe Asset Shortages and the Nominal Term Structure of U.S. Interest Rates

I use an affine term structure model with unspanned macro variables to investigate the importance of high Chinese growth before the financial crisis and low Chinese growth following the crisis for the U.S. long-term nominal interest rates. Before the financial crisis, a higher Chinese nominal growth increases Chinese foreign reserves, mainly in the form of the U.S. Treasuries, and decreases the estimated five-year Treasury yield by signaling the lower expectations of the U.S. nominal short rate. The effect of the Chinese nominal growth on the U.S. nominal term structure is the sum of the effects of the Chinese leading indicator and inflation. These empirical findings are important to understand the secular decline of long-term nominal interest rates in the U.S. before the financial crisis. After the financial crisis, the lower Chinese real growth lowers the estimated five-year Treasury yield mainly by lowering the estimated five-year Treasury term premium and to a lesser extent by signaling the lower U.S. future nominal short rate. I measure the effect of the Chinese real growth on the U.S. nominal term structure with the Chinese leading indicator after I control for the inflation. Lower Chinese real growth contributes to understanding the unusually low long-term nominal interest rates in the U.S. after the financial crisis.

Growing Pension Deficits and the Expenditure Decisions of UK Companies

Large deficits have opened up on defined benefit pension schemes in the United Kingdom since 2007, and at the same time investment expenditure has been subdued; this is a common phenomenon in other countries too. We use privileged access to a unique new data set from The Pensions Regulator and two identification schemes to investigate the effects of deficits and deficit recovery plans on UK companies’ dividends, investment, wages and cash holdings. Identification is based on the close relationship between low long-term interest rates and pension deficits; and the external regulation of pension schemes by The Pensions Regulator. We show that firms with larger pension deficits voluntarily pay lower dividends, but they do not invest less. However, firms that are required to make deficit recovery contributions by the regulator have lower dividend and investment expenditure compared to other firms, and more so if they are financially constrained. These effects are large for some individual companies, but macroeconomically small compared to the stimulus offered by the Bank of England’s quantitative easing policy.

Powrót do przedkryzysowej polityki pieniężnej a stabilność systemu finansowego

Faced with the financial crisis in 2008, the central banks used conventional monetary policy instruments. However, the problem of zero lower bond forced them to use unconventional monetary policy instruments - quantitative easing carried out as part of the so-called central bank balance sheet politics and relying on the buying by the central bank of di&erent kinds of financial assets - resulting in stabilization of the situation on financial markets in conditions of low long-term interest rates. Balance sheet totals of the central banks rose repeatedly. Their structure also changed. At present possible effects for the stability of the financial system of the return to the pre-crisis monetary policy are the topic of debate. The exit strategy is giving rise to a significant risks and the coordination of economic policy and the transparency of action taken by monetary authorities can only minimize possible negative effects

Keynes on the Sequencing of Economic Policy: Recovery and Reform in 1933

On 31 December 1933, The New York Times published an open letter from John Maynard Keynes to President Franklin D. Roosevelt (FDR). In it Keynes encouraged FDR to expand public works through government borrowing. He also criticised FDR’s exchange rate policy, and argued that there was a need for lower long-term interest rates. But perhaps the most interesting feature of this letter is that Keynes made comments on the sequencing and speed of economic policies. He argued that ‘recovery’ policies should precede ‘reform’ measures. In this paper, I analyse this particular aspect of the open letter, and I argue that for Keynes exchange rate stability was a key component of what he considered to be the appropriate order of policy. I also provide a comparison between Keynes’s views on sequencing and those developed in the 1980s and 1990s.

Post-Crisis Secular Shifts in the Capital Markets and the Global Economy Could Foster a New Normal

Seven years of subpar growth in the slowest U.S. economic recovery since the Great Depression raises the question of a new paradigm that limits future expansion. The problem derives from prolonged tepid global demand largely born of retrenchment in China. But it is also rooted in adverse fiscal, monetary and regulatory policies in the major economies, linked by a common political bent in the West that weighs on the private economy. U.S. measures taken in the aftermath of the financial crisis have created possible secular changes in the capital markets and the economy that could permanently hamper general prosperity, despite current record high stock prices and low reported unemployment. Obstacles include the Dodd-Frank Act, rock-bottom interest rates, the demise of private-label securitization, and the possible reinstatement of the Glass-Steagall Act. Regulatory capital restrictions on financial institutions based on an exaggerated perception of risk unnecessarily limit bank profitability, credit availability and market liquidity, disrupting their traditional intermediation role between lenders, investors and borrowers. Financial and non-financial regulation has suppressed business investment essential for economic growth. Chronic historically low short-term and long-term interest rates imposed by the Fed have misdirected massive capital into stocks and bonds at the expense of goods and services. In the process, savers and investors dependent on interest income suffer while borrowers pile on debt, including the government. The current $4.2 trillion balance sheet the Fed has amassed as a result, as well as expanded powers assigned by Congress, unduly empower that institution. The demise of mortgage securitization by private banks has curtailed lending and exacerbates the predominance of nationalized Fannie Mae and Freddie Mac in the housing market. This further puts the taxpayer at risk of defaults from economic downturns and the government’s social justice agenda imposed on their underwriting standards. In addition, the misguided call for the return of the Glass-Steagall separation of commercial and investment banking, particularly in respect of certain proprietary trading, would deny banks capital-bolstering revenue diversification, as well as limit liquidity in the securities markets raising the cost of capital as a result. In addition to regulation, growing government intrusion through spending and taxation sustain the malaise. Sadly, this intervention garners growing popular support from those disaffected by stagnant growth who call for ever more wealth redistribution from the haves to the have nots. Accordingly, the national debt, which has nearly doubled since the Great Recession, continues to grow unabated, further choking off the ability of the private economy to prosper. Indeed, the political class, and too many Americans, increasingly eschew the traditional meritocratic model of past success in favor of the egalitarian state. All told, post-crisis changes augur continued sclerosis at the cost of millions of jobs. As such, current restraints could contribute to structural unemployment marked by greater income inequality, a wider skills gap, and a lower standard of living, notwithstanding certain misleading nominal measures to the contrary.Without question, normalized interest rates and sufficiently less government spending, taxation and regulation can get America, and the world, growing again. Over time, secular change is inevitable and often beneficial. But the continuation of unduly suppressed free markets will assure a new normal in the future where the weak 2% annual growth of the last seven years might seem quixotic.

The British Attempt to Manage Long-Term Interest Rates in 1962-64

The British monetary authorities tried to encourage lower long-term interest rates through their government debt management operations between 1962 and 1964, consistent with a recommendation of the Radcliffe report. The implementation of the policy was complicated by the need for the Bank of England to act as a market-maker in the government securities market, and beset by misunderstandings between the Treasury and the Bank of England. The policy was quietly abandoned when the conditions of strong market demand for bonds on which it depended changed. The paper describes how the policy was developed and implemented, and the impact of political preferences on it.

The British attempt to manage long-term interest rates in 1962–1964

The British monetary authorities tried to encourage lower long-term interest rates through their government debt management operations between 1962 and 1964, following the Radcliffe report's recommendation that they should have an objective for long-term rates, and with the intention of supporting the government's pursuit of faster economic growth. The implementation of the policy was complicated by the Bank of England's role as a market maker in the government securities market, and beset by misunderstandings among the monetary authorities. The policy was abandoned when the conditions of strong market demand for bonds on which it depended changed. The article describes how the policy was developed and implemented, and the impact of political preferences on it.

Quantitative Easing: The Challenge for Households Long-Term Savings and Financial Security

The extremely low long-term interest rates in capital markets, to a relevant extent induced by quantitative easing, imply significant challenges for retirement saving and the stability of households’ purchasing power over the long-term. The reason is that prices for the two most important long-term savings objectives – housing and healthcare – are rising substantially, while long-term return in safe instruments is virtually zero. Savers face a major dilemma: either they miss long-term savings objectives and see purchasing power decline, or they compromise financial security and invest in highly volatile assets, such as equity, whose return is highly uncertain and potentially negative. This issue is especially relevant in Europe where equity markets are much less developed and where some major European indices are still today trading below the levels reached in the year 2000.

The Effects of Monetary Policy on Mortgage Rates

Economic events over the past decade have changed central bank policies in the United States and around the world. The housing and financial markets experienced significant changes as the markets first surpassed historical highs and then underwent a recession grave enough to draw comparison with the Great Depression. To spur recovery, the Federal Reserve first lowered short-term interest rates to near-zero and eventually embarked on several phases of large-scale asset purchases (LSAPs) to lower long-term interest rates and mortgage rates. This paper describes the evolution of the LSAP program and analyzes how interest rates and mortgage rates changed during that time. Both the long-term interest rates and mortgage rates reached historical lows in the post crisis period, primarily due to the Federal Reserve Board's accommodative policies. Two econometric approaches—an event study and a time series model—estimate the market response during each phase of the LSAP program and provide projections of mortgage rates under different shock assumptions. Results suggest that early tapering announcements helped reset interest rates and mortgage rates upwards and any rise in long-term interest rates resulting from unanticipated events (whether related to tapering or not) could lead to further increases in mortgage rates.

The Long Wave Revisited

A key question for businesses and investors is whether the low inflation and low long-term interest rates we are now experiencing are a business cycle or a longer-term phenomenon. This paper updates and expands my earlier study on long waves [Synnott 1995]. Using this analytical perspective, I conclude that it is likely that high-grade, long-term bond yields will remain low, especially in real terms, for several years. Low long-term real interest rates for an extended period give the United States a major opportunity for investment and growth, as in previous long-term cycles, provided that appropriate government policies and plans are in place.

The Sustainability of Pension Schemes

Poor financial market returns and low long-term real interest rates in recent years have created challenges for the sponsors of defined benefit pension schemes. At the same time, lower payroll tax revenues in a period of high unemployment, and rising fiscal deficits in many advanced economies as economic activity has fallen, are also testing the sustainability of pay-as-you-go public pension schemes. Amendments to pension accounting rules that require corporations to regularly report the valuation differences between their defined benefit pension assets and plan liabilities on their balance sheet have made investors more aware of the pension risk exposure for the sponsors of such schemes. This paper sheds light on what effects these developments are having on the design of occupational pension schemes, and also provides some estimates for the post-employment benefits that could be delivered by these schemes under different sets of assumptions. The paper concludes by providing some policy perspectives.