Money Market Rates Research Articles

构建中国利率走廊的实证分析

选择银行间质押式回购利率为货币市场代表性利率，以常备借贷便利为走廊上限做中国利率走廊模拟，结果表明，目前只有隔夜和7天品种的利率走廊效果明显。借助泰勒规则，对隔夜、7天、1个月、3个月、6个月五个期限品种的银行间质押式回购利率进行检验，结果显示，五种期限品种的质押式回购利率都满足泰勒规则。这说明，以质押式回购利率为标志的中国货币市场利率具有较高程度的可预估性；质押式回购利率可以作为中国利率走廊的目标利率；经过进一步持续的跟踪、模拟，可以形成中国利率走廊上限模型，并将之付诸市场实践。 We try to construct China Interest Rate Corridor by selecting the rates of REPO as a representative of China money market rates, and capped by SLF (Standing Lending Facility) rates, unfortunately only 2 (overnight and 7-days) of the 5 rates (plus: 1 month, 3 months, 6 months) have been effectively channeled by the respective corridors. But interestingly, all the 5 rates successfully passed the empirical test under Taylor’s Rule. It demonstrates that, under Taylor’s Rule, the REPO rates are to a greater degree predictable. So, it is reasonable to choose some REPO rate/rates as the target rate/rates of interest rate corridors, and it is also probable to further establish corridor cap by modeling, and put them into practice thereafter.

Central Bank Communication and the Yield Curve

We extract novel measures of ECB target rate announcement and communications shocks using high frequency data on money market rates and study their impact on yields of Eurozone countries. We find that (i) target rate shocks have little effect on changes in bond yields of Eurozone countries, while communication shocks have a significant impact, with intermediate maturities being affected the most; (ii) positive (negative) communication shocks significantly lower (raise) the yield spread between the peripheral and core countries; (iii) this cross-sectional difference arises after the 2008 financial crises; (iv) higher credit risk amplifies the effect of communication shocks, and more so for core countries. We rationalize these findings in a parsimonious international term structure model in which interest rates are determined by the interaction between risk-averse arbitrageurs and reaching-for-yield investors.

Effects of Changing Monetary and Regulatory Policy on Overnight Money Markets

Money markets have been operating under a new monetary policy implementation framework since the Federal Reserve started paying interest on bank reserves in late 2008. The regulatory environment has also evolved substantially over this period. We develop and test hypotheses regarding the effects of changes in the monetary and regulatory policy on dynamics of key overnight funding markets. We find that the federal funds rate continued to provide an anchor, albeit weaker, for unsecured funding rates amid substantial decline in activity and changing composition of trades, while its transmission to the repo market had been hampered. The overnight reverse repurchase (ON RRP) operations that started in late 2013 contributed to stronger co-movement among overnight funding rates and markedly reduced their volatility. The change in the FDIC assessment fees and Basel III leverage ratio regulations have exacerbated financial-reporting-day effects in unsecured markets. In contrast, consistent with lower dealer leverage in the post-crisis period, such effects have weakened in the repo market, especially after the inception of the ON RRP facility. Finally, superabundant bank reserves appear to have significantly diminished the effects of reserve-maintenance on the money market rates.

Risk-Adjusted Covered Interest Parity: Theory and Evidence

We extend the theory of covered interest parity (CIP), aligning the different risks involved in uncollateralized money market transactions and collateralized foreign exchange (FX) swap transactions, which underscore CIP deviations in times of elevated uncertainty. We postulate that the swap dealer behaves as if he tries to filter out the counterparty risk embedded in money market rates in pricing FX swaps. Our results suggest that he does so not only during turbulent times but also under normal market conditions. The extended theory also uncovers a simple way to disentangle counterparty and liquidity risk premiums embedded in money market rates.

The Federal Reserve's Tools for Policy Normalization in a Preferred Habitat Model of Financial Markets

We develop a model to analyze monetary policy implementation with multiple Federal Reserve liabilities and superabundant reserves. The analysis demonstrates the Federal Reserve's tools including interest on excess reserves (IOER), overnight reverse repurchase agreements (ON RRP), and term deposits should allow the Federal Reserve to raise the short‐term interest rates to any desired level. We find the contribution of each the increase in the IOER and ON RRP offering rates in firming money market rates suggested by the data during the December 2015 policy tightening event is remarkably similar to the effect of each tool implied by the calibrated model.

Determinants of loan interest rates in a country with a currency board: Evidence from Bulgaria

This article examines the process of loan interest rate formation in Bulgaria. While the standard approach in the literature on interest rate pass-through is focused on the impact of changes in the domestic money market rate, the objective of this study is to adapt the existing interest rate pass-through analysis to the case of a country with a currency board arrangement. To this end, the role of money market conditions in the euro area and the influence of the domestic business climate are taken into account. The impact of these factors on loan interest rates in Bulgaria is examined through symmetric as well as asymmetric error-correction models. The analysis identifies specific patterns in the response of loan interest rates depending on the sector of the borrower, the currency denomination and the maturity of loans.

LONG-RUN RISK AND MONEY MARKET RATES: AN EMPIRICAL ASSESSMENT

Using postwar U.S. data, I study the implied interest rates in a simple long-run risk (LRR) model. Empirical estimates show that, as in standard consumption-based models with power utility preferences, the movements of the implied risk-free rate are entirely determined by the variations of expected consumption growth. This leads to a negative relationship between LRR Euler equation rates and money market rates. Nevertheless, when the low-frequency movements of consumption growth are accounted for, the long-run component of consumption growth is a key element to partially capture the countercyclical variations of the money market rates.

Pricing Mid-Curve Money Market Future Options in Lognormal LIBOR Model

Abstract In this note we describe the one factor HJM(LLM) model for pricing Mid-Curve Money Market Future Options. The model is based on assuming a lognormal process for the relevant forward money market (“LIBOR”) rates and imbedding it into the general no-arbitrage HJM interest rate modeling framework (understood in the most general sense as a manifestly self-consistent framework for formulating interest rate models in terms of any type of interest rate, including the observable market rates [2, 3, 4]). The relevant convexity adjustment factor is calculated by leveraging on the known functional form for the discount bond price volatility in any no-arbitrage lognormal “LIBOR” rate model and approximating it with a leading order deterministic approximation. This makes it possible to derive an analytic expression for the HJM(LLM) model Discount Propagator using the path integral techniques and leads to the explicit analytic pricing formula for the Mid-Curve future options.

Monetary policy independence reconsidered: evidence from six non-euro members of the European Union

This study measures the degree of de-facto monetary policy independence of a national central bank. This measurement might allow a central bank to assess the gains and losses in sovereign affecting the national money market when the country’s own currency is given up and a common one is adopted. The study applies a multivariate GARCH-model to the money market rates of six members of the European Union (EU) that have not adopted the common currency. It finds that the central banks of Sweden, Romania, and Poland would not lose considerable de-facto independence by adopting the euro. Their daily money market rates co-move strongly with the euro money market rates, which is a sign of already low monetary policy dependence despite floating exchange rates. This result confirms other research with co-integration techniques, although the coefficients of co-movement with the euro money market are lower in the present study. Lower coefficients can be explained by the impact of non-mean reverting money market rates after heavy shocks in turbulent market periods, which slacken the co-movement ties. The opposite results were obtained for the central banks of the UK, the Czech Republic and Hungary. Hungary is a problematic case: notwithstanding a low co-movement of money market rates with the euro market rates, the almost explosive volatility of money market rates after a shock signals a very poor effectiveness of monetary policy.

The Declining Structural Liquidity Deficit: Challenges and Possible Solutions

The structural liquidity deficit in Russia’s banking sector is on the decline, and it will certainly continue to go down over the course of 2016. This phenomenon is going to make it difficult for the Bank of Russia to implement its interest rate policy in the regime of a symmetric interest rate corridor. It is possible and feasible for the RF CB to implement measures designed to maintain a structural liquidity deficit and achieve the practical target of its lending policy – to ensure that short-term money market rates remain close to the key policy rates.

ASEAN Financial Market Integration -- A Rainbow on the Horizon?

This paper reveals the degree of integration of financial markets in selected ASEAN economies. Few studies on this topic provide evidence that integration of the region’s financial markets remains limited, despite the steady growth of intra-ASEAN trade (the share of intra-ASEAN trade to total ASEAN trade increased from 17% in 1990 to 24% in 2013). Over time, while the demand for financial services to support economic activities has led to financial system growth alongside economic development, the financial services appear to have less integration. We applied correlation and cointegration analyses to study financial integration over two periods (before and after the Asian financial crisis of three countries, namely Malaysia, Singapore and Thailand and three non-ASEAN countries, namely Hong Kong, Japan and the USA). Pairwise correlation of money-market rates appear to have increased from 8 (pre-crisis) to 15 (post-crisis) significantly. The multivariate co-integration test suggests the presence of at least two cointegrating equations (pre-crisis and post-crisis) in the money and stock markets of the ASEAN region.

Predicting Bank Interests When Monetary Rates Are Close to Zero

Monetary policies, either actual or perceived, cause changes in monetary interest rates. These changes impact the economy through financial institutions, which react to changes in the monetary rates with changes in their administered rates, on both deposits and lendings. The dynamics of administered bank interest rates in response to changes in money market rates is essential to examine the impact of monetary policies on the economy. Chong et al. (2006) proposed an error correction model to study such impact, using data previous to the recent financial crisis. In this paper we examine the validity of the model in the recent time period, characterized by very low monetary rates. The current state of close-to-zero monetary rates is of particular relevance, as it has never been studied before. Our main contribution is a novel, more parsimonious, model and a predictive performance assessment methodology, which allows comparing it with the error correction model.

Impact Study of Central Bank Communication to Money Market Benchmark Interest Rate

In the past two decades, central bank communication as a new type of monetary policy tool has continually received attention from central banks. With the gradual advance of the market-led interest rate process, most central banks establish policy operation framework which can effectively guide and regulate the market interest rate. This article is based on the implementation of China’s monetary policy tools framework, using EGARCH model to empirically study the impact of central bank communication as a new monetary policy tool to benchmark money market rates. The result indicates: the influence of central bank communication to SHIBOR is significant, the direction of impact is in accordance with the direction of monetary policy intentions; verbal communication is more remarkable than written communication in affecting the SHIBOR; increasing the central bank of communication can dampen short-term interest rate fluctuations and can play a positive role in the financial markets.

Is the Monetary Policy of the WAEMU Credible? An Empirical Analysis Based on the Rule Forward Looking

This study aims at making available to the Central Bank of West African States (BCEAO) authorities an additional decision tool that would enhance their transparency and credibility. Therefore the Taylor rule, which connects the level of short term interest rates in output gap and the gap between the rate of inflation and the inflation target the mass money was introduced, net foreign assets and a dummy variable to capture the effects of the 1994 devaluation of the generalized method of moments (GMM) particularly suitable in the context of Forward looking rules is used here. The results obtained from annual data (1985-2014) shows that the estimated rule does not pretty much describe the behavior of money market rates over the period. Moreover, it seems that Central Bank of West African States (BCEAO) gives more and more weight to support the activity and the stabilization of prices, anything that weakens its effectiveness and credibility. Our results confirm the need for the central bank to return to its policy primarily based on inflation targeting sit for the credibility of its monetary policy.

Bank Interest Rate Setting in the Euro Area During the Great Recession

This paper sheds light on how recent financial tensions in the euro area were ultimately reflected in bank interest rate setting. We make two new contributions. First, we develop a theoretical model capturing banks financing and the rate setting choices. Banks in the model can finance themselves through deposits, on the money market and/or by issuing bonds. Second, we assemble a novel database and put our model to test. Our model extends that of Gambacorta (2004), as we formalise banks' decision to issue debt endogenously. Gambacorta's analysis was conducted for Italian banks and did not include the recent financial crisis. Instead, we focus our analysis on the Great Recession period (July 2007 to October 2014) and euro area banks. From a monetary policy perspective, both our theoretical model and the empirical results provide useful information on the impact of some of the measures introduced by the ECB during the financial crisis. First, the ECB introduced specific measures to alleviate tensions in money markets. To the extent that these measures fostered stability in money markets, and reduced the volatility of money market rates, this paper shows that they were also channelled to bank rates. Second, the ECB also introduced measures to address tensions in bond markets. Our results also show that having access to debt financing has important implications for bank rate setting.

Reassessing the Asymmetries and Rigidities in the Interest Rate Pass-Through Process: A Hidden Co-Integration Approach

Neubewertung der Asymmetrien und Rigiditäten in dem Zinssatz Übertragungsprozess: Ein Ansatz versteckter Kointegration Diese Arbeit untersucht die bestehenden Asymmetrien und Rigiditäten der Zinstransmissionskanäle in den Industrieländern USA, GB, Kanada, Japan und der Eurozone. Wir verwenden ein "Crouching Error Correction Model„ als ökonometrische Methodologie. Die akkurate Messung verschiedener Aspekte des Zinstransmissionsmechanismus verbessert unser Verständnis vom Verhalten der Zinssätze im Kundengeschäft. Des Weiteren kann hierdurch die Effizienz geldpolitischer Maßnahmen auf nationaler und supranationaler Ebene gesteigert werden. Die Ergebnisse unserer empirischen Analyse deuten an, dass sich die Geldpolitik verstärkt an den Transmissionskanälen der Marktzinsen anstelle der Zentralbankzinsen ausrichten sollte. Weiterhin konnte ein inhomogenes, preisstarres und asymmetrisches Verhalten in den Kredit / Einlage-Märkten beobachtet werden.

Long-Run Retail Interest Rate Pass-Through In The Euro Area: The Effect Of The Financial Crisis

This paper analyzes the long-run pass-through of money market rates to retail interest rates (both lending and deposit rates). We rely on fully harmonized data from MIR statistics (MFI Interest Rates) for 8 countries of the euro area. From January 2003 to February 2014, interest rates are observed on a monthly basis on new contracts related to the three largest segments of the banking market (consumer, mortgage, and Non-Financial Corporations - NFCs). The long-term pass-through is measured following the Phillips and Loretan (PL) approach which is proved to be more effective than the Engle-Granger OLS (EG-OLS) approach. We also investigate the effect of the financial crisis on the degree of the long-run pass-through. Results suggest that the financial crisis deepens the heterogeneity of the speed and degree of the bank rates adjustment mechanism. Moreover, within the same country, the characteristics of long-run pass-through differ both among banking products and time horizon.

The transmission of foreign shocks to South Eastern European economies: A Bayesian VAR approach

The paper analyses the macroeconomic effects of foreign shocks in three South-East European (SEE) economies: Croatia, Macedonia and Bulgaria. In this regard, we investigate the transmission of several eurozone shocks (output gap, money market rates and inflation) on various macroeconomic variables in the aforementioned countries (output, inflation, money market rates and budget deficits). We trace the effects of foreign shocks on the basis of impulse response functions obtained from the Bayesian Vector Auto Regressions (VARs) separately for each country. The main findings from our study are: first, economic expansion in the eurozone has strong output and inflation effects on SEE economies, implying some degree of synchronization of business cycles; second, eurozone inflation is instantly and to a great extent transmitted to domestic inflation, suggesting that inflation in the SEE economies is mostly driven by foreign inflation; third, domestic money market rates are not closely linked with eurozone money markets; fourth, monetary policy in the SEE countries does not seem to be responsive to eurozone inflation shocks; and fifth, the fiscal authorities attempt to offset the spillover effects from both economic expansion and monetary tightening in the eurozone.

(An Analysis of Interlinkage Among the Money, Stock, and Foreign Exchange Markets)

Korean Abstract: 본 연구에서는 월별 자료를 이용하여 자금시장과 주식시장, 그리고 외환시장이 동태적으로 서로에게 어떤 영향을 미치는지를 살펴보았다. 먼저 축약형 벡터자기회귀모형(VAR)을 최소자승추정법(OLS)으로 추정한 후 Q'Q=QQ'=I의 성격을 갖는 Givens 행렬을 이용하여 경제이론모형에 기반을 둔 부호제약조건을 충족시키는 충격반응함수들을 구하였다. 다음으로 이 충격반응함수들로부터 중위수, 5번째 백분위수, 95번째 백분위수의 충격반응함수들을 도출한 후 촐레스키 분해를 통해 구한 충격반응함수와 비교하였다. 실증적 분석결과는 통상적인 촐레스키 분해에 근거한 충격반응분석이 이들 시장간의 연계성을 설명하는 데 한계를 가지고 있음을 보여준다. 또한 주식시장과 외환시장간의 연계성은 이들 시장과 자금시장간의 연계성에 비해 높을 뿐만 아니라 단기금리의 상승 충격은 케인즈언 모형의 예상과 달리 원/달러환율을 상승시킨다. 최근으로 올수록 주식시장 충격이 외환시장에 미치는 영향은 커지는 반면 외환시장 충격이 주식시장에 미치는 영향은 작아진다. English Abstract: The paper investigates the dynamic interlinkage between the money, stock, and foreign exchange markets from impulse response analyses using monthly data. First, it obtains the impulse response functions which satisfy sign restriction conditions based on economic theories using a Givens matrix after it estimates a reduced-form VAR model by OLS. Next, it derives median, 5 percentile, and 95 percentile impulse response functions from them and then compares them with the impulse response functions based on Choleski decomposition. The empirical results show that the impulse response analysis using Choleski decomposition has limits to explain the interrelations between three markets. The interlinkage between stock and foreign exchange markets is relatively higher, compared to that between these markets and the money market. A positive shock to the money market rate increase won/dollar exchange rates and this result is different from the anticipation of the Keynesian theory. The effect of shock to the stock market o the foreign exchange market recently becomes stronger. On the contrary, an impact of the latter on the former becomes weaker.

Interest rate pass-through estimates from error correction models ECM

This paper examines the degree of pass-through and adjustment speed of retail interest rates in response to changes in monetary policy rates in commercial banks of Viet Nam during the period 07/2004 to 06/2014. The results show that the degree of pass-through of retail interest rates is incomplete but high (0.7-0.93). The adjustment speed of money market rates & retail interest rates is relatively slow. It takes from 3 to 6 months for money market rates & retail interest rates to be adjusted to long-term equilibrium, except 1 month VNIBOR. 1 month VNIBOR is sensitive to changes of discount rate & refinancing rate in short-term, contrary to 3 month VNIBOR . The degree of pass-through from market rates to retail interest rates is fairly high in the long-term but low in the short-term. The degree of pass-through is different between various retail interest rates. Specifically, the degree of pass-through of deposit rates is higher than that of lending rates both in the short-term & long-term.