Interest Rate Movements Research Articles

Time dependent behavior of the Asian and the US REITs around the subprime crisis

PurposeThe study uses an AR(1)‐EGARCH(1,1) model to investigate the pricing behaviors of the real estate investment trusts (REITs) for four countries (Australia, Japan, Taiwan and the USA) before and after the 2007 financial crisis.Design/methodology/approachThe study uses an AR(1)‐EGARCH(1,1) model to investigate the pricing behaviors of the REITs.FindingsThe results show that after the financial crisis, REITS returns show a stronger linkage to the overall market returns but they are not sensitive to expected interest rate movements, except for the Taiwanese REIT market, which shows a negative and significant reaction to the interest rates. There are stronger asymmetric effects of good and bad news on REIT returns particularly after the post financial crisis for the four REIT markets.Research limitations/implicationsAn examination of the relationship between REIT and the stock market provides information as how REIT provides an effective device related to the stock portfolio diversification.Practical implicationsIt would be interesting to see how the Asian REIT markets differ from the US market on return and risk behavior.Originality/valueThe 2007 subprime crisis happened because of the decline of the real estate market prices in the USA. It represents a special opportunity to examine the time‐dependent behavior of REIT returns in a turbulent market environment.

Macroeconomic dynamics in Macedonia and Slovakia: Structural estimation and comparison

This paper estimates a structural macroeconomic model using data for Macedonia and Slovakia to characterize possible challenges Macedonia can face concerning macroeconomic stabilization during its transition process. A comparison of the estimated model parameters suggests that, in Slovakia, the output gap is less sensitive to real interest rate movements and prices experience greater inertia. The estimated monetary policy reaction functions show Macedonia and Slovakia as inflation targeters, with Macedonia as the more conservative one, despite its officially applied exchange rate targeting regime. The differences in the estimated parameters imply differing transmission mechanisms for Macedonia and Slovakia. Consequently, the variance of domestic variables in Slovakia is most influenced by monetary policy shocks, while there is no single dominating shock explaining the volatility of Macedonia's macroeconomic variables. The exchange rate shock, the monetary policy shock and the demand shock are jointly important in determining the volatility of Macedonia's variables. The model simulations indicate that Macedonia experiences lower output gap and inflation volatility than Slovakia. This comes, nevertheless, at the cost of higher interest rate and real exchange rate volatility in Macedonia, which could be an indication of more volatile financial markets with possible negative implications for financial stability.

Long-Term Debt Pricing and Monetary Policy Transmission under Imperfect Knowledge

Under rational expectations, monetary policy is generally highly effective in stabilizing the economy. Aggregate demand management operates through the expectations hypothesis of the term structure: Anticipated movements in future short-term interest rates control current demand. This paper explores the effects of monetary policy under imperfect knowledge and incomplete markets. In this environment, the expectations hypothesis of the yield curve need not hold, a situation called unanchored financial market expectations. Whether or not financial market expectations are anchored, the private sector’s imperfect knowledge mitigates the efficacy of optimal monetary policy. Under anchored expectations, slow adjustment of interest rate beliefs limits scope to adjust current interest rate policy in response to evolving macroeconomic conditions. Imperfect knowledge represents an additional distortion confronting policy, leading to greater inflation and output volatility relative to rational expectations. Under unanchored expectations, current interest rate policy is divorced from interest rate expectations. This permits aggressive adjustment in current interest rate policy to stabilize inflation and output. However, unanchored expectations are shown to raise significantly the probability of encountering the zero lower bound constraint on nominal interest rates. The longer the average maturity structure of the public debt, the more severe is the constraint.

Analisis Investasi Instrumen Obligasi

Companies are difficult to obtain bank loans in large amounts can obtain public funds by selling bonds. Because the relationship is directly intertwined with public investors, the loan amount can be larger with a cheaper interest rate than bank loans. For the investor, investing in bonds relatively more than the profitguarantee stock. Bond investors from income levels can be calculated relatively from awal.Obligasi generally provide a fixed interest rate for six the first month. Usually, in order to attract investor interest, fixed rate bonds are set higher than the bond launched on time deposito.Jika interest rates move down, then the isseur (corporate bonds) will suffer a loss. However, if the bonds are sold at the interest rate moves up, it could be that the effect was not offered investors received. For the investor risks losing the possibility of falling bond prices and bond investment opportunities outside if at that time the interest rate more higher than the interest rate bonds. Issuance of bonds, in particular, is much more difficult than stocks because bond issuers should consider carefully the movement of interest rates. For investors who are actively conducting transactions, the instrument can also bring in revenue bonds in the form of capital gains. The bondholders have the right to claim precedence over shareholders.

Does Central Bank Capital Matter for Monetary Policy?

Heavy foreign exchange intervention by central banks of emerging markets have lead to sizeable expansions of their balance sheets in recent years?accumulating foreign assets and non-money domestic liabilities (the latter due to sterilization operations). With domestic liabilities being mostly of short-term maturity and denominated in local currency, movements in domestic monetary policy interest rates can have sizable effects on central bank's net worth. In this paper we examine empirically whether balance sheet considerations influence the conduct of monetary policy. Our methodology involves the estimation of interest rate rules for a sample of 41 countries and testing whether deviations from the rule can be explained by a measure of central bank financial strength. Our findings, using linear and nonlinear techniques, suggests that central bank financial strength can be a statistically significant factor explaining large negative interest rate deviations from optimal levels.

Credit Risk – Creating System of Credit Risk Management in Changing Economic Conditions in Macedonian Banks

Credit risk policy is one of the most important instruments of economic policy. Experiences from developed countries and countries in transition show that the optimal credit risk policy is an essential prerequisite for accelerating economic development. The effectiveness of the mechanism in achieving this goal involves the fulfilment of certain conditions: stabilization of prices and elimination of price disparities, coordination of movements of exchange rates, inflation and interest rates, etc. In countries with a diversified financial structure, achieving these prerequisites, as well as the formation of interest rates on the balanced value is realized through the action of the market mechanism. Given that most of these issues are present in Macedonia, it is necessary to identify and critically re-assess the effects of credit risk policy on economic developments, as well as preventive measures to reduce risk11Brown C. Keith, Reilly K. Frank: Investment portfolio Analysis and Portfolio Management, Thomson South Western, 2004, pp 243. While financial institutions have faced difficulties over the years for a multitude of reasons, the major cause of serious banking problems continues to be directly related to 1ax credit standards for borrowers and counterparties, portfolio risk management, or a lack of attention to changes in economic or other circumstances that can lead to a deterioration in the credit standing of a bank's counter counterparties. The aim of the paper is to give a view of the concentration of the financial system, credit risk to which are exposed Macedonian banks as well as measures that are to be taken preventively in order to influence the reduction of credit risk.

Does Central Bank Capital Matter for Monetary Policy?

Heavy foreign exchange intervention by central banks of emerging markets have lead to sizeable expansions of their balance sheets in recent years?accumulating foreign assets and non-money domestic liabilities (the latter due to sterilization operations). With domestic liabilities being mostly of short-term maturity and denominated in local currency, movements in domestic monetary policy interest rates can have sizable effects on central bank's net worth. In this paper we examine empirically whether balance sheet considerations influence the conduct of monetary policy. Our methodology involves the estimation of interest rate rules for a sample of 41 countries and testing whether deviations from the rule can be explained by a measure of central bank financial strength. Our findings, using linear and nonlinear techniques, suggests that central bank financial strength can be a statistically significant factor explaining large negative interest rate deviations from optimal levels.

GOVERNMENT DEBT SUSTAINABILITY: THE LITHUANIAN CASE

The paper deals with some aspects of sustainability of the government debt of Lithuania for a long, medium and short time horizon. The purpose of the study is to investigate the sustainability of the debt with respect to the nominal GDP growth, the interest rate on the debt, and the primary budget deficit. The differential equations calculus technique is used for the analysis of the debt. A scenario approach is used to simulate the sensitivity of the debt to economic shocks. An inequality for a non-increasing debt over a medium term is applied for the possibility to restore the level of the debt to a pre-crisis level. The sensitivity of the debt to a short movement of interest rate, the GDP growth rate and the primary budget deficit is investigated. A rule of debt change in a short run by one percentage point is formulated.

An analysis of the statistical relationship between precious metals prices and other monetary policy variables and inflation in South Africa

This study looked at the statistical relationship between precious metals prices, oil prices, money supply, interest rates and exchange ratesandinflation. It particularly looked at how inflation was influenced by these variables over time. The findings in this study were consistent with the hypothesis that the values of these variables influence inflation in the short-term and long-term. One of the findingsthat could be of interest especially for South Africa indicates that precious metalsprice changes, especially gold,could act as signals of pending changes to inflation and are also statistically related to interest rate movements. However, it was also found that the relationship between exchange rates movements during the financial crisis era between 2008 and 2010 did affect the other variables like prime, precious metals prices and oil prices which led to significant spikes in inflation. It should be emphasized that these finding of a statistical relationship is only consistent with observed data pertaining to South Africa and not proof of such behaviour prevailing in other markets. Even then, such a conclusion would require the isolation of a number of country specific behaviours and factors that may be correlated with precious metals prices, oil prices, exchange rates and interest rates and that may simultaneously affect inflation, which this study did not factor in. However, knowledge of statistical relationships can help in informing monetary policy responses and designing appropriate portfolio strategies although these findings do not provide unambiguous proof of any underlying behavioural hypothesis.

Interest Rate Sensitivities Under the Vasicek and Cox-Ingersoll-Ross Models

Benchmark models for the term structure and dynamic of the interest rate, having the instantaneous rate as the only state variable, were introduced by Vasicek (V) and Cox-Ingersoll-Ross (CIR). Then the measure of a zero-coupon bond price change with respect to any change of the short-term interest rate movement is made by a sensitivity parameter referred as a stochastic duration. Therefore this last notion is theoretically superior to the Macaulay's duration under which the yield-curve is assumed to have made a parallel shift. However, empirical tests on bond immunization performance have not demonstrated any actual superiority of the stochastic duration when compared to the simple classical duration.Consequently in the present paper, we introduce alternative zero-coupon sensitivities with respect to the one-factor shock related to the considered V/CIR model. They lead to a high accuracy level for the approximation of the bond change with respect to the short-term interest rate movement. Our finding allows to get pointwise estimates of a bond hedging error. This is economically more sounding than the standard variance approach. Moreover our result has an implication on stress-testing framework. Indeed we get explicit expressions which enable us to map a view on shocks onto a view on the future bond change. The approach, we introduce here, is suitable for the perspective of hedging or managing a global portfolio or hybrid products.

A realistic model for official interest rate movements and their consequences

This article extends the Vector Autoregression (VAR) methodology to examine the consequences of monetary policy decisions by considering two types of nonlinearities in the determination of official interest rates: (1) the asymmetry related to the different nature of the discrete and infrequent positive and negative interest rate movements determined by central bankers and (2) the convexity in the transmission of policy shocks induced by the nonnegativity constraint in interest rates. For the UK, we find some evidence of both types of asymmetries. In the US, responses to unexpected interest rate shocks are far more symmetric. Results highlight the importance of considering all types of asymmetries when studying monetary transmission.

Can households form consistent/convergent and unbiased expectation of interest rate?

Expectation reliability remains a question. In this article, we test whether the households could form unbiased expectation of interest rate. From the Survey of Consumer Finance (SCF), we find that the majority of households hold higher interest rate expectation, and by simple t-test, the interest rate movement in 5 years does not support such expectation. Additional evidence from the Survey of Economic Expectations (SEE) confirms that it is hard to accept that the households could form unbiased expectation of interest rate.

Exchange Rate and Interest Rate Exposure of UK Industries Using Ar(1)- Egarch-M Approach

Exchange rate and interest rate risk have been documented as the most managed financial risks by most UK non-financial firms and industries. This is probably because of the severe adverse effects that contrary movements in these financial risks can have on the value of the firm or industry. Nevertheless, empirical studies on these risks have been very few and predominantly limited in scope. Therefore, using a sample of 402 UK non-financial firms from 31 industries, over the period January 1990 to December 2006, this study examines the relevance of these financial risks on the stock returns of firms and industries. Following the weaknesses of the Ordinary Least Square (OLS) methodology, the AR(1)EGARCH-M model was subsequently used for the estimation. The results indicated that the stock returns of UK industries were more affected by long-term interest rate risk than exchange rate risk (Trade weighted index, US$/£ JP¥/£) or even short-term interest rate risk. Additionally, by means of the Herfindahl index as a measure of industry concentration, competitive industries were found to exhibit a higher degree of exposure to movements in exchange rates and interest rates, and also higher volatility in returns than industries that were classified as concentrated. Finally, it was also found that for most UK industries: increased risk did not necessarily lead to an increase in returns; severe adverse movements in exchange rates and interest rates can potentially make returns more volatile; volatility of returns has time varying properties; and the persistence of volatility is much higher in some industries than others.

Net national savings and the Japanese long-term interest rate

This article discusses why the interest rate on Japanese government bonds is so low in comparison with other industrialized countries with a better credit rating, after correcting for inflation differences. We find that the net savings surplus has kept the long-term interest rate low. Japanese interest rate movements are much better explained by the current account balance in comparison with other industrialized countries. For most industrialized countries the results are statistically insignificant. For a country integrated in international financial markets, the savings-investment balance should theoretically not have a significant impact on domestic long-term interest rate formation. Institutional factors have contributed to this higher level of significance for Japan in comparison with other countries. Monetary policy and institutionalized purchases of government bonds by semi-government agencies have kept demand for bonds high and the interest rate low.

Did Household Consumption Become More Volatile?

I show that after accounting for predictable variation arising from movements in real interest rates, preferences and income shocks, liquidity constraints and measurement errors, volatility of household consumption in the US increased by 25 percent between 1970 and 2004. The increase was lower than that of volatility of family income. Nonwhite and those with less than 13 years of education, for whom there was no differential increase in income volatility, experienced a significantly larger increase in volatility of household consumption. Substantial differences in wealth and access to credit markets point to the main reason for this divide. JEL: D12, D14, E21, J15

Can Fiscal Policy Stimulus Boost Economic Recovery?

We assess the role played by fiscal policy in explaining the dynamics of asset markets. Using a panel of ten industrialized countries, we show that a positive fiscal shock has a negative impact in both stock and housing prices. However, while stock prices immediately adjust to the shock and the effect of fiscal policy is temporary, housing prices gradually and persistently fall. Consequently, the attempts of fiscal policy to mitigate stock price developments (e.g. via taxes on capital gains) may severely de-stabilize housing markets. The empirical findings also point to significant fiscal multiplier effects in the context of severe housing busts, which gives rise to the importance of the implementation of fiscal stimulus packages. In addition, our results suggest that when governments run a budget deficit, they place an upward pressure on real interest rates, which crowds-out private consumption and investment. In contrast, during bust periods, unexpected variation in the fiscal stance crowds-in private spending, which reflects the direct and indirect effects of policy actions impact arising from a downward movement in real interest rates and an upward revision in price level expectations.

Trends and Correlates of Remittances to India

The current global economic slowdown had raised the concern that the remittances to developing countries would slow down. This paper examines the remittance flows to India and analyzes their correlates. Remittances to India exhibit a strong growth over time, with the rate of growth averaging about 10 percent a year in constant USD since 1991. Remittances in real USD declined by 7 percent in 2009 but rebounded quickly to register a 9 percent growth rate in 2010. We find that the movement of remittances is limited around the trend and has not traditionally been affected by the domestic or external macroeconomic variables. This pattern has changed somewhat since early 2000s, and remittances have responded to the domestic and international interest rates movements, and to the price movements in the Indian stock market. Looking ahead, the recent developments in the global economic conditions are not likely to slow down the flow of remittances to India even if the current global weaknesses persist or deteriorate further.

Term Premia and the News

How do monetary policy expectations and term premia respond to news? This paper provides new answers to this question by means of a dynamic term structure model (DTSM) in which risk prices are restricted. This leads to more precise and more reliable estimates of expectations and term premium components. I provide a new econometric framework for DTSM estimation that allows the researcher to select plausible constraints from a large set of restrictions, to correctly quantify statistical uncertainty, and to incorporate model uncertainty in the inference about risk pricing. The main empirical result is that under the restrictions favored by the data the expectations component, and not the term premium, accounts for the majority of high-frequency movements of long-term interest rates and for essentially all of their procyclical response to macroeconomic news. At both high and low frequencies, term premia are more stable than implied by a DTSM with unconstrained risk prices. The apparent disconnect between long-term rates and policy rates that has puzzled macroeconomists for some time is resolved by appropriately restricting the risk adjustment in models for bond pricing.

Nonlinear interest rate reaction functions for the UK

We empirically analyze Taylor-type equations for short-term interest rates in the United Kingdom using quarterly data from 1970Q1 to 2006Q2. Starting from strong evidence against a simple linear Taylor rule, we model nonlinearities using logistic smooth transition regression (LSTR) models. The LSTR models with time-varying parameters consistently track actual interest rate movements better than a linear model with constant parameters. Our preferred LSTR model uses lagged interest rates as a transition variable and suggests that in times of recessions the Bank of England puts more weight on the output gap and less so on inflation. A reverse pattern is observed in non-recession periods. Parameters of the model change less frequently after 1992, when an inflation target range was announced. We conclude that for the analysis of historical monetary policy, the LSTR approach is a viable alternative to linear reaction functions.

Monetary Policy Transmission Mechanisms in Pacific Island Countries

During the global financial crisis, central banks in Pacific island countries eased monetary policy to stimulate economic activity. Judging by the ensuing movements in commercial bank interest rates and private sector credit, monetary policy transmission appears to be weak. This is confirmed by an empirical examination of interest rate pass-through and credit growth. Weak credit demand and underdeveloped financial markets seem to have limited the effectiveness of monetary policy, but the inflexibility of exchange rates and rising real interest rates have also served to frustrate the central banks’ efforts despite a supporting fiscal policy. While highlighting the importance of developing domestic financial markets in the long run, this experience also points to the need to coordinate macroeconomic policies and to use all macroeconomic tools available in conducting countercyclical policies, including exchange rate flexibility.