Negative Real Interest Rates Research Articles

A Model of Zombie Firms and the Perils of Negative Real Interest Rates

A Model of Zombie Firms and the Perils of Negative Real Interest Rates

Evaluating Australia's financial conditions: A comparative analysis and extension of a dynamic factor model index

AbstractThis article investigates the unique financial conditions in Australia in the wake of COVID‐19, a subject of critical importance given the recent unprecedented economic events such as the fastest rate rises since the 1990s and the presence of persistently high inflation. This study aims to contribute to the literature by examining the speed of interest rate changes and its implications on financial conditions, particularly in an environment characterised by negative real interest rates. The research aims to extend and refine the financial conditions index (FCI) developed by the Reserve Bank of Australia by incorporating a momentum variable to capture the speed of interest rate changes. A dynamic factor model is utilised to investigate 73 data series across nine main categories, constructing the FCI on a quarterly basis. The results indicate that rapid interest rate changes significantly impact financial conditions, holding significant weights within the model, thus requiring careful policy considerations.

Türkiye’nin Gelenek Dışı Para Politikasının Lisanssız Güneş Santrallerinin Kârlılığı Üzerine Etkisinin Değerlendirilmesi

Türkiye’s unorthodox monetary policy implemented between September 2021 and June 2023 affected many macroeconomic indicators including inflation. Turkish Central Bank’s (CBRT) continuous lowering of the policy interest rate increased the negative real interest rate constantly. As a result, households invested in alternative assets including housing, foreign currency and gold in order to hedge against inflation. This increase in demand soared real estate prices. Besides, land is an important cost item for solar power plant investments. Considering the linear relationship between land prices and housing prices, this paper investigates the effect of the increase in housing prices on the capital expenditure (CAPEX) of 37 unlicensed solar power plant projects in Türkiye. According to the results, a correlation of -0.97 was determined between the real interest rate and housing price index in Türkiye. In addition, a correlation of 0.20 was found between housing price index and the CAPEX of unlicensed solar power plants. This situation indicates that the increase in housing prices primarily due to the unorthodox monetary policy might adversely affected the profitability of unlicensed solar power plants, since CAPEX is an important factor affecting the profitability. Although the unconventional monetary policy has been abandoned as of July 2023, the negative effects of this policy on the economy, especially inflation, still continue. Policies and practices that would increase the profitability of solar power plants will make significant contribution to the renewable energy investors and Türkiye's green transition. In this context, development and issuance of carbon development credits under the voluntary carbon market standards such as Global Carbon Council (GCC) Standard and International Carbon Standard (ICR) presents additionality to support solar power plant investors and help the country to reach her carbon neutrality target.

People are people: A comparative analysis of risk attitudes across Europe

AbstractIn this paper, we conduct a detailed examination of the determinants of attitudes to financial risk among retail investors in six European countries (Belgium, France, Germany, Italy, Spain and the United Kingdom). We find that respondents from the United Kingdom and Belgium are the most risk tolerant while those from Spain are the least. We observe remarkable similarities in the distributions of risk tolerance across countries despite cultural differences and considerable variations in the extent to which risky investing is undertaken as a routine part of financial planning. We further show that country effects in the cross‐sectional variation of attitude to risk scores are swamped by the impacts of gender, salary and wealth, while financial knowledge and prior investment experience are much more important still. Our results have implications for regulators and those who wish to encourage European investors to consider going beyond bank savings and guaranteed products to more prevalent stock market investing in an era of negative real interest rates.

How the Fed Caused Negative Real Interest Rates, Its Effects, and Policy Implications for Stock, Bond, Gold and Bitcoin Returns

How the Fed Caused Negative Real Interest Rates, Its Effects, and Policy Implications for Stock, Bond, Gold and Bitcoin Returns

Hyperinflation and banks

In this paper we consider a triangular inter-dependence between hyperinflation, financial repression, and the financial crisis in FRY in the 1990s. When all three vertices of the triangle are present, the crisis propagates and is amplified along its edges. We focus, especially, on the less studied link between the financial crisis and financial repression in FRY. Setting administrative limits on interest rates under conditions of hyperinflation leads to deeply negative real interest rates. The situation in FRY was further aggravated by credit allocation to privileged participants. Under such circumstances, all dinar components of bank balance sheets quickly became worthless, credit activities of banks died down and real quantities of dinars in circulation became negligible. The situation improved only after the removal of the outside repression (i.e. removal of sanctions), reorganization of the entire financial sector and the entrance of foreign banks into the Serbian market at the beginning of 2000s.

Managing the Risks of Negative Interest Rates

The acceleration in the issuance of government debt since the global financial crisis has led central bankers to engineer interest rates that are historically low in nominal terms and consistently lower than inflation rates. Although the ostensible aim of this policy is to stimulate economic growth, maintaining negative real rates also goes a long way so that government debt is manageable and will decline in the long run, relative to the size of the economy. Financial institutions hold the great majority of government debt, and their books of retail and corporate loans are expanding briskly at a time when ultra-low interest rates make borrowing especially attractive. Rates paid on deposits are low, in advanced economies, even negative in the euro zone in nominal terms. That helps to offset the reduction in income that banks earn on their lending. Even so, the extreme and unique conditions resulting from persistent negative real interest rates mean that banks must take particular care to manage their interest-rate risk in the context of other risk types and the banks’ profit-and-loss analysis.

The Side Effects of Safe Asset Creation

Abstract We present an incomplete markets model to understand the costs and benefits of increasing government debt when an increased demand for safety pushes the natural rate of interest below zero. A higher demand for safe assets causes the zero lower bound (ZLB) to bind, increasing unemployment. Higher government debt satiates the demand for safe assets, raising the natural rate, and restoring full employment. However, this entails permanently lower investment, which reduces welfare, since our economy is dynamically efficient even when the natural rate is negative. Despite this, increasing debt until the ZLB no longer binds raises welfare when alternative instruments are unavailable. Higher inflation targets instead allow for negative real interest rates and achieve full employment without reducing investment.

Macroeconomic Trends among Visegrád Countries, EU Balkans, and the U.S., 1991-2021

The paper provides an introduction to the special issue. It shows a sense in which VisegrĂĄd and Balkan EU countries are correlated in macroeconomic performance and integrated with the global business cycles. Using inflation rate levels as a starting point to characterize when these countries began their transitions, it shows that after 1996 both real GDP growth and real interest rates move together to a significant degree both with each other and with the US. This provides a background from which to view the paths since the collapse of the Soviet Union that these transition economies have taken. In addition, comparison is made to US money and banking policy, to provide an outline of how this may impact progress in the transition region. A subsequent summary of the other articles in the issue shows an inter-relation in their themes about how Central, Eastern, and Southeast Europe have progressed since 1991, and how these paths may be affected by Western economic policy. Implications for Central European audience: The paper shows that transition regions can be impacted by international financial integration, including to possible detriment when capital markets are regulated by policy that pushes real interest rates below their natural levels. Negative real interest rate policy since the 2008-2009 financial crisis and again during the Covid crisis may hasten the rise of autocratic democracy and limit social, political, and economic freedom.

Die Corona-Schulden gehören ins Endlager

Abstract Germany and other European countries have piled up considerable public debt in response to the Corona crisis. But owing to the ultra-low interest rates, which are likely to remain for the foreseeable future, there are no concerns regarding debt sustainability. Quickly paying down this debt by imposing austerity would be the wrong strategy from an economic point of view, but it could nevertheless imposed by existing fiscal rules. Those rules should be reformed quickly. The right way to handle the Corona debts is to engage in debt rollover, that is, to essentially inflate them away in times of negative real interest rates.

The ZIRP trap – The institutionalization of negative real interest rates

This paper analyzes the consequences of the monetary policies enact-ed by Western central banks from 2008 on and the possibilities to end these policies. Zero interest rate policies (ZIRP) actually impaired the recovery that was underway by subsidizing a distorted structure of production. The over­ indebtedness of Western economies was artificially propped up thus delaying recovery. We also show how ZIRP fosters moral hazard, the development of new bubbles and breeds unintended consequences that destabilize the finan­ cial system. ZIRP adversely influences entrepreneurship and culture by discour­ aging hard work and prudent investment. In today´s central bank world, ZIRP implies the institutionalization of negative real interest rates. It harms traditional entrepreneurial virtues, complicates long-term planning, politicizes society and erodes the foundations of capitalism.
 Exiting ZIRP is politically costly. We analyze the exit options that remain for policy makers, including financial repression, high inflation, default, capital levies, bail-ins and currency reforms, and evaluate them from a free-market perspective.
 Keywords: ZIRP, unconventional monetary policy, overindebtedness, exit op­ tions, negative real interest rates.
 JEL Classification: E14, E31, E32, E52
 Resumen: Este artículo analiza las consecuencias de las políticas monetarias de los bancos centrales a partir de 2008 y la posibilidad de salir de estas políticas extraordinarias. ZIRP impidió la recuperación subvencionando una estructura productiva distorsionada. El sobreendeudamento de las economías occidentales se mantuvo y alargo artificialmente retrasando la recuperación. Mostramos también que ZIRP causa riesgo moral, el desarrollo de nuevas bur-bujas y consecuencias no intencionadas que desestabilizan el sistema financie-ro. ZIRP afecta negativamente a la función empresarial y a la cultura. Desincen-tiva el trabajo y la inversión prudente. En el mundo actual de bancos centrales, ZIRP implica la institucionalización de tipos de interés reales negativos. Daña las virtudes empresariales tradicionales, complica la planificación a largo pla-zo, politiza la sociedad y mina las bases del capitalismo.
 La salida de ZIRP es políticamente costosa. Analizamos las opciones de salida que les quedan a los políticos incluyendo la represión financiera, una inflación elevada, el incumplimiento en los pagos, los impuestos sobre el capital, bail-ins y reformas monetarias que son evaluadas desde una perspectiva liberal.
 Palabras clave: política de tipo de interés cero (ZIRP), política monetaria no convencional, sobreendeudamiento, opciones de salida, tipos de interés reales negativos.
 Clasificación JEL: E14, E31, E32, E52.

Versatile forward guidance: escaping or switching?

We examine forward guidance when an economy faces negative natural real interest rates and subsequent supply shocks. We introduce two versatile designs: escaping and switching. In the former, the central bank escapes low interest-rate commitment when inflation reaches a self-chosen threshold. In the latter, the central bank can switch from interest-rate forecasts to inflation forecasts any time. Central bankers are scrupulous and face intrinsic (or extrinsic) costs when they deviate from their policy announcements in the future. We show that switching forward guidance is preferable over escaping forward guidance if and only if negative real interest rate shocks are moderate. Furthermore, with the polynomial chaos expansion method and Sobol’ Indices, we identify the decisive parameters and show that our findings are globally robust to parameter uncertainty.

Gold's Value as an Investment

For investors, gold is an asset without a yield that is attractive in times of low and negative real interest rates. Gold also has an embedded put option because investors can sell it to those who value its use as jewelry or as a productive input. This paper presents an approach for pricing gold from investors' perspective based on no-arbitrage principles. There is no need to specify investor preferences and the main input for pricing gold is a term structure model for real interest rates. The model implies that on average more than half of the value of gold is due to its role as an investment asset. When fitted to match 10-year real US Treasury rates the model can replicate the salient fluctuations in the time series of gold prices since 2007.

Statistical analysis and stochastic interest rate modeling for valuing the future with implications in climate change mitigation

High future discounting rates favor inaction on present expending while lower rates advise for a more immediate political action. A possible approach to this key issue in global economy is to take historical time series for nominal interest rates and inflation, and to construct then real interest rates and finally obtaining the resulting discount rate according to a specific stochastic model. Extended periods of negative real interest rates, in which inflation dominates over nominal rates, are commonly observed, occurring in many epochs and in all countries. This feature leads us to choose a well-known model in statistical physics, the Ornstein–Uhlenbeck model, as a basic dynamical tool in which real interest rates randomly fluctuate and can become negative, even if they tend to revert to a positive mean value. By covering 14 countries over hundreds of years we suggest different scenarios and include an error analysis in order to consider the impact of statistical uncertainty in our results. We find that only 4 of the countries have positive long-run discount rates while the other ten countries have negative rates. Even if one rejects the countries where hyperinflation has occurred, our results support the need to consider low discounting rates. The results provided by these fourteen countries significantly increase the priority of confronting global actions such as climate change mitigation. We finally extend the analysis by first allowing for fluctuations of the mean level in the Ornstein–Uhlenbeck model and secondly by considering modified versions of the Feller and lognormal models. In both cases, results remain basically unchanged thus demonstrating the robustness of the results presented.

Monetary Policy: Is the Dual Mandate of the Fed Maximizing the Social Welfare?

In this work we deal mostly with the recent (2008-present) Federal Reserve operated monetary policies, which are two unprecedented and distinct monetary policy regimes. The Zero Interest Rate Regime (2008:12-2015:11) and the New Regime (2015:12-2018:12). These different monetary policy regimes provided various outcomes for inflation, interest rates, financial markets, personal consumption, personal savings, real economic growth, and social welfare. Some of the important results are that monetary policy appears to be able to affect long-term real interest rates, risk, the prices of the financial assets, and very little the real personal consumption, personal savings, and the real economic growth during the recent period of extreme monetary policy, in which the Fed held short-term interest rates abnormally low for an extended period (2008-2015) and the present time, which keeps the federal funds rate below the inflation rate. The Fed’s interest rate target was set during those seven years at 0% to 0.25%. On December 16, 2015, the Fed started increasing the target rate by 25 basis points approximately in each FOMC meeting, from 0.25% to 0.50% to 0.75%, and presently to 2.50%. We want to explain the low level of long-term interest rates and the real rate of interest (cost of capital) in the economy. The evidence suggests that it is the Fed the main cause of the low (negative) real interest rate following the 2007-2008 financial crisis. This monetary policy was not very effective (the zero interest rate target of the Fed). It has created a new bubble in the financial market, future inflation, and a redistribution of wealth from risk-averse savers to banks and risk-taker speculators. In addition, it has increased the risk (RP) by making the real risk-free rate of interest negative. The effects on growth, prices, and employment were gradual and very small, due to outsourcing and unfair trade policies, which have affected negatively the social welfare. The dual mandate (price stability and maximum employment) of the Fed is not sufficient to maximize the social welfare of the country.

In Search of Reforms for Growth: New Stylized Facts on Policy and Growth Outcomes

The lack of growth response to “Washington Consensus” policy reforms in the 1980s and 1990s led to widespread doubts about the value of such reforms. This paper updates these stylized facts by analyzing moderate to extreme levels of inflation, black market premiums, currency overvaluation, negative real interest rates and abnormally low trade shares to GDP. It finds three new stylized facts: (1) policy outcomes worldwide have improved a lot since the 1990s, (2) improvements in policy outcomes and improvements in growth across countries are correlated with each other (3) growth has been good after reform in Africa and Latin America, in contrast to the “lost decades” of the 80s and 90s. This paper makes no claims about causality. However, if the old stylized facts on disappointing growth accompanying reforms led to doubts about economic reforms, new stylized facts should lead to some positive updating of such beliefs.

La reforma financiera de 1946 y el sector industrial en la Argentina durante el Peronismo (1946 – 1955): los casos de Alpargatas S.A. y Acindar S.A.

La reforma financiera aplicada en la Argentina a partir de 1946 significó una importante re organización institucional del Estado, del sistema bancario y de la orientación económica. Entre sus aspectos salientes, se destacan la gran expansión del volumen de crédito y la existencia de tasas reales de interés fuertemente negativas. Diversos autores han señalado la importante transferencia de ingreso que esta dinámica significó hacia el sector industrial. No obstante, no se han realizado estudios de caso de empresas industriales que permitan verificar tal hipótesis. A partir del estudio de la contabilidad de Alpargatas S.A. y Acindar S.A. este trabajo busca cuantificar el impacto de la reforma de 1946 sobre las estrategias de financiación,la inversión y los resultados económicos. Se parte de la hipótesis de que la misma facilitó la inversión industrial y, a través de las tasas de interés subsidiadas, constituyó una fuente clave de beneficios para el sector industrial.

Secular Stagnation in an Economy with Land

I present a model of secular stagnation with land and infinitely-lived agents with wealth preferences. Land is the prime example of a non-producible productive asset and rules out a negative real interest rate in steady state. With standard wealth preferences, higher land prices stimulate consumption and full employment is always feasible in steady state unless the central bank follows a deflationary policy. In contrast, secular stagnation emerges as the unique equilibrium of the monetary economy if wealth preferences are insatiable. In contrast to conventional wisdom, it is very existence of land itself that prevents full employment from being feasible in this case. Increases in the inflation target are no longer effective in restoring full employment as stagnation is a real phenomenon. These conclusions hold if households require a risk premium on land. Then, a higher risk premium can restore full employment when wealth preferences are insatiable.

The Side Effects of Safe Asset Creation

We present an incomplete markets model to understand the costs and benefits of increasing government debt when an increased demand for safety pushes the natural rate of interest below zero. A higher demand for safety widens spreads, causing the ZLB to bind and increasing unemployment. Higher government debt satiates the demand for safe assets, raising the natural rate, and restoring full employment. This entails permanently lower investment which reduces welfare, since our economy is dynamically efficient even when the natural rate is negative. Despite this, increasing debt is optimal if alternative instruments are unavailable. Alternative policies which permit negative real interest rates - higher inflation targets, negative nominal rates - achieve full employment without reducing investment.

Productivity Growth and Real Interest Rates in the Long Run

Despite the unemployment rate's return to low levels, inflation-adjusted or "real" interest rates have remained negative. One popular explanation for persistently negative real interest rates is that long-run productivity growth has slowed. I study the long-run relationship between real interest rates and productivity growth from 1914 to 2016 and find a negative correlation between these two variables. Hence, low productivity growth has been historically associated with high real interest rates. Since World War II, the correlation between these variables has been near zero. This suggests that slow long-run productivity growth is not driving real interest rates to be persistently negative.