Raise Interest Rates Research Articles

The financial benefits of the IMF

The IMF provides loans to countries in financial distress at a relatively low interest rate. In this article we calculate how much the seven largest debtors to the IMF have saved on interest payments during the Asian crisis and its aftermath. We explain how the IMF can charge these low interest rates and at what cost for creditor countries. The conditionality attached to the use of IMF resources in the form of policy measures reduces moral hazard behaviour; we argue that this is a better instrument than raising interest rates on IMF loans. JEL Codes: F34, F32, F33, O16

Trends and Calendar effects in Malaysia’s Stock Market

Investing can help a person's wealth to generate more, and investing in stock is proven as one of the most profitable forms of available investment. The benefits gained in stock broking are immediate Buy/Sell which investor can sell part of their investment any time and at low transaction cost. However, investing in stock will require investor to observe the market, as market can be a volatile place and investor need to acquire knowledge of what they actually are doing. This study will discuss the price trends over the year, and how it will get affected by the seasonality in Malaysia, which also known as the calendar effects. The factor to be investigated in this study is the price on holiday’s season, the January effect or any other monthly seasonality. The daily price of KPJ Healthcare Berhad for the year 2011 is the sample was chosen in this study. Further this study, data used is derived from the weak-form efficient markets hypothesis, which is the price history and case study. Regression method is used in this study in order to help achieving the findings. This should be a continuous study, and adding on more other factors, such as wars and economic crises, and traders, investors and other speculators. This paper has proved the existence of calendar anomalies in KPJ's stock price for Chinese New Effect, Aidilfitri Effect and Christmas Effect. However, the price changes are believed more likely due to the investors tormenting about central banks raising interest rates to restrain rising inflation. Other than that, for Aidilfitri Effect and Christmas Effect, further study should be perform since the raise of the stock market, may be due to the world’s stock market begin to be stronger after the European sovereign debt crisis to Spain and Italy in August. Conversely, there are positive returns for January. However, the findings are non-related to the January effect. This is because January effect arises due to tax-loss selling, which Malaysia has a different tax system compared to other countries. Shareholders in Malaysia are not necessary to pay any taxes on the return they gained from share trading.

A Public Investment Stimulus in Surplus Countries and Its Spillovers in the EA

The Euro Area recommendations endorsed by the European Council in 2016 called for a differentiation of the fiscal effort by individual Member States, taking into account spillovers across Euro Area countries. This article shows model-based simulations of an increase in public investment in Germany and the Netherlands and their spillovers to the rest of the Euro Area. While spillovers in a monetary union may be small when monetary policy reacts by raising interest rates, when rates are kept constant and the stimulus is accommodated, spillovers can be sizeable. An increase in (productive) spending in Germany and the Netherlands can boost GDP in these countries and also have significant positive spillovers on the rest of EA GDP, while the effects on current accounts are likely to be small. Effects can be even larger when investment is directed to the most productive projects. With low borrowing costs at present, the increase in government debt for surplus countries will be modest, while there could be an improvement in debt ratios in the rest of the Euro Area.

Janet Yellen: Time to Tighten?

In August 2015, Janet Yellen, chair of the Board of Governors of the Federal Reserve System (the Fed), was feeling uncertain. Many were trying to anticipate her decision about whether she and the Federal Open Market Committee (FOMC) would raise interest rates at the upcoming September meeting. But Yellen herself wasn't sure. Yellen wanted to understand the perspective of those who continued to worry about the consequences of expansionary monetary policy. To do so, and to understand the policy tradeoffs she faced, she had to consider the history of events that led to her current conundrum. Excerpt UVA-GEM-0139 Rev. Aug. 23, 2017 Janet Yellen: Time to Tighten? In August of 2015, Janet Yellen was, in a word, uncertain. Many were trying to anticipate her decision about whether she and the Federal Open Market Committee (FOMC) of the Federal Reserve System (the Fed) would raise interest rates at the upcoming September meeting. But Yellen herself wasn't sure. She was known for expressing concerns about unemployment—she had at times favored expansionary monetary policy to fight unemployment. But considering that interest rates had been at the lowest level in the Fed's history for over six years (Exhibit1), the unprecedented expansion of the monetary base since the Great Recession (Exhibit2), and the potential risks for asset price bubbles and eventual inflation, Yellen yearned for a normalization of U.S. monetary policy. The Fed's charter dictates a dual mandate: it must adjust monetary policy to achieve maximum employment and stable inflation. The challenge for Yellen—and for central banks around the world—was that these competing objectives were often difficult to balance. Furthermore, some members of the FOMC and prominent economists worried that efforts to achieve these objectives today could have adverse consequences for inflation and employment in the future. James Bullard, president of the Federal Reserve Bank of St. Louis, expressed his concerns in a February 2012 speech: The recent recession has given rise to the idea that there is a very large “output gap” in the U.S. The story is that this large output gap is “keeping inflation at bay” and is fodder for keeping nominal interest rates near zero into an indefinite future. If we continue using this interpretation of events, it may be very difficult for the U.S. to ever move off of the zero lower bound on nominal interest rates. This could be a looming disaster for the United States. . . .

Financial Deepening, Interest Rate Spread and Economic Growth: New Evidence from Sub-Sahara Africa

This study examines the nexus between financial deepening, interest rate spread and economic growth using data from Sub-Sahara African (SSA) countries. A dynamic panel approach is employed in estimating the parameters of the specified equation using the Sargan test of over-identification restriction in assessing the validity of the instruments used in addressing potential endogeneity problems of the data. The results show that whilst financial deepening positively drives growth, interest rate spread adversely affect growth in countries studied. In terms of relative effects, the results indicate that enhancing financial deepening by10.0 percent induces economic growth on average by a margin of 4.2 percentage points. On the contrary, however, raising interest rate spread by 10.0 percent reduces growth on average by a margin of 3.6 percentage points in countries studied. Based on these findings, there is a strong need for the implementation of policies that promote financial deepening. In particular, there is a strong need for financial authorities supervising the activities of commercial banks to ensure low interest rate spreads with a view to promoting the efficiency of banks in effectively playing their financial intermediation role to boost economic growth for poverty reduction in SSA countries.

Asset Price Learning and Optimal Monetary Policy

We characterize optimal monetary policy when agents are learning about endogenous asset prices. Boundedly rational expectations induce inefficient equilibrium asset price fluctuations which translate into inefficient aggregate demand fluctuations. We find that the optimal policy raises interest rates when expected capital gains, and the level of current asset prices, is high. The optimal policy does not eliminate deviations of asset prices from their fundamental value. When monetary policymakers are information-constrained, optimal policy can be reasonably approximated by simple interest rate rules that respond to capital gains. Our results are robust to a wide range of belief specifications as well as to the inclusion of an investment channel.

Retos y situaciones de una economía cambiante frente a fenómenos económicos.

La revista Finanzas y Política Económica ha tenido el privilegio de trabajar con autores de diferentes lugares del mundo, quienes han venido desarrollando investigaciones y cuyas colaboraciones a la disciplina económica han dejado un aprendizaje sustancial para los lectores y estudiosos de las temáticas publicadas en los diferentes números.En las últimas décadas, los ciclos económicos y políticos han estado fuera de sincronización y han puesto de manifiesto problemas de recesión. La generalización de las consultas populares mineras en Colombia —que podrían generar un impacto fiscal y afectar las finanzas de la nación—, la proliferación de mercados emergentes en América, Europa y Asia y el colapso del precio del petróleo —aunque sigue siendo vital para economías de países que dependen de estos recursos— son situaciones, entre muchas otras, que evidencian una economía cambiante. Por un lado, políticos populistas ganan credibilidad y prometen economías más prósperas y, por otro, la Reserva Federal de Estados Unidos continúa con la tendencia de subir las tasas de interés. ¿Cuáles serán los efectos de estos fenómenos? Son retos y situaciones que no terminan ahí; por ello, dada la trayectoria y las cambiantes tendencias de la ciencia económica con sus diversas temáticas en los ámbitos nacional e internacional, en este número se presentan temas que contribuyen a la comprensión de estos movimientos económicos y políticos en el escenario mundial.

The influence of public debt on the performance of the economy

Thanks to public debt, nations maintain a stable tax rate and at the same time raise expenses for suppressing budget crises. Public debt is considered risk-free and is issued by the national government. However, extensive public debt raises interest rates, extrudes private investments, worsens fixed balance, widens short-term fluctuation and has a negative impact on economic growth. The performance of the economy can be measured mostly by GDP, which is expressed as the monetary value of all finished products and services produced in a certain time period in one country. The aim of this paper is to explore the relationship, or rather identify the mutual correlation of public debt of one country and its performance (GDP). The research includes countries of the European Union, which have an identifiable timeline of public debt and GDP. The source of this data is the database of the World Bank. The information is from the period of years from 1995 through 2015. The correlation of the whole file of countries and then individual countries is ascertained. On the basis of the results, we can state that in the explored sample of countries, high dependence between public debt and GDP has been proven.

Crises in Economic Thought, Secular Stagnation, and Future Economic Research

Crises in Economic Thought, Secular Stagnation, and Future Economic Research

Bond Buyback at Deutsche Bank

The case describes a 2016 debt buyback transaction for Deutsche Bank, a major, global, systemically important bank. The case focuses on the large, global bank during a turbulent period, giving students the opportunity to consider both the specific issue of whether Deutsche Bank should do a debt buyback as well as the strategic, regulatory, and macroeconomic issues the bank was facing. This case is suitable for an MBA elective course in capital markets, financial institutions or financial strategy. It is also suitable to be taught at an EMBA or GEMBA program. Excerpt UVA-F-1790 Rev. Mar. 30, 2017 Bond Buyback at Deutsche Bank It's hard to stand up and smile a lot and give much of a vision…We're a bank, we're a regulated entity, we don't have much latitude in what we do. — John Cryan, CEO Deutsche Bank By any standard, the health of the financial sector in the opening months of 2016 had global investors jittery. They were concerned about the prospects of global growth, valuations in financial markets, and the potential of a hard landing of the Chinese economy. The markets sold off significantly in one of the few corrections (a 10% move lower) of the seven-year bull market that had begun in 2009. By mid-February of 2016, U.S., European, and Asian stocks were down over 10%. At the same time, investors began buying bonds, which led to a dramatic decline in yields. In addition, central banks, reluctant to raise interest rates, kept them low. By early February, the U.S. 10-year Treasury bond yielded 1.63%, down sharply from 2.24% at the beginning of the year. In the midst of this sell-off, financial sector stocks were one of the hardest hit. . . .

Stepping on a Rake: Replication and Diagnosis

This paper replicates Sims (2011) “stepping on a rake” model. It derives the model, shows how to solve it, offers some extensions, and boils the paper down to its central ingredient. Sims’ article is important: it is a simple modern economic model that produces a temporary decline in inflation when the central bank persistently raises interest rates. Inflation then rises. The model’s essential feature is long term debt. When interest rates increase, the nominal market value of long-term government debt falls. If fiscal surpluses are unchanged, the price level must fall so that the real value of government debt matches the unchanged real present value of surpluses. The model offers a unified treatment of interest rate targets, quantitative easing and forward guidance that works even in a frictionless setup.

The Global Financial Crisis and Retail Interest Rate Pass-Through in Australia

In this paper, we examine the impact of the global financial crisis (GFC) on the interest rate pass-through for four types of loans in Australia: mortgages, residentially secured small business lending, nonsecured small business lending and personal loans. Australia is an interesting case study since its central bank lowered but also raised interest rates during the GFC. We find that after the onset of the crisis, there has been a shift in the way banks adjust their lending rates in response to changes in market interest rates; the markup has increased and there has been a drop in both short- and long-term pass-through from funding costs to lending rates. Closer analysis indicates that the drop in short-term pass-through is due to the slower response of banks to increases in funding costs. We also find asymmetries in the way banks adjust lending rates in relation to funding costs in the long-run for nonsecured small business lending and personal loans. The evidence shows that banks in Australia tightened lending standards and competed less aggressively for loans but more for deposits in response to heightened default risks following the global financial crisis. The wider margin allows banks to adjust their lending rates more slowly and asymmetrically.

World Economic Prospects

Overview: Global growth picking up at the end of the year We have lifted our world GDP growth forecasts for both 2016 and 2017 by 0.1 percentage points, to 2.3% and 2.7% respectively. And we have raised our 2018 world growth forecast from 2.7% to 2.9%, mainly on the back of a significant upgrade to our US outlook. Global indicators point to a pick‐up in activity in Q4. The global manufacturing PMI rose to a 27‐month high in November, while the composite index – which includes services – was at its highest level for a year. Indicators of international trade continue to paint a mixed picture. Global trade volumes declined slightly over the previous month in September but that came after a strong gain in August, and it looks like the trough in the world trade cycle has been passed. We expect a gradual strengthening in world trade over the next couple of years provided president‐elect Trump do not follow through on his protectionist threats. Trade should be underpinned by stronger growth in the US: we have lifted our 2017–18 growth forecasts to 2.3% and 2.5% respectively (from 2% and 1.9%). Our more bullish stance is driven by the anticipated effects of president‐elect Trump's expansive fiscal policies and his less protectionist tone. Tax cuts and business deregulation could also unleash investors' ‘animal spirits’, helping offset the effects from a stronger dollar and heightened policy uncertainty. Stronger growth means that, in addition to a nearcertain hike in December, we now see the Fed raising interest rates twice in 2017 and three times in 2018. This, in turn, is reflected in a steeper yield curve for government bonds than previously expected. This will also pose higher risks for emerging markets that remain exposed to capital outflows and are vulnerable given their stock of US$ denominated debt. Countries with large current account deficits such as Turkey and South Africa are likely to be most affected Economic activity in the Eurozone remains resilient to the shocks of recent months. Following the ECB's announcement of an extension of its QE programme and increasing divergence between monetary policies compared to the US, we now see the euro falling to parity against the US dollar by the end of 2017.

The World Economy: Forecast Summary

The world economy is expected to grow by 3.0 per cent in 2016, an unchanged forecast from the May Review. However, world growth in 2017 is revised down to 3.3 per cent from 3.5 per cent.A number of financial sector risks remain. Many large Euro Area banks are fragile, with the banking system in Italy particularly weak. This is likely to test the viability of the Single Rulebook covering financial services.Inflation is likely to be below target in the OECD economies in 2017. The European Central Bank (ECB) stands ready to ease monetary conditions while the Federal Reserve is likely to raise interest rates very gradually.

Проблеми дефіциту державного бюджету України і шляхи їх розв’язання

У період кризового стану економіки та соціально-економічної нестабільності в Україні дуже гостро постало питання дефіциту бюджету. Протягом останніх років державний бюджет України стикається з такою великою проблемою як дефіцит, що виникає внаслідок перевищення витрат державного бюджету над доходами.
 Метою написання статті є дослідження наявних проблем дефіцитності державного бюджету України, обґрунтування причино-наслідкових зв’язківки у системі дефіцитного фінансування державної діяльності та розробка шляхів її оптимізації. Під час дослідження опрацьовано наукові праці українських учених та практиків, які вивчають проблеми дефіциту державного бюджету, законодавчі та урядові матеріали. Використано такі загальнонаукові методи: метод пізнання, метод системного аналізу, метод аналізу та синтезу, а також метод порівняння.
 Розглянуто сутність дефіциту бюджетної системи та причини його виникнення в Україні. Глибинними причинами бюджетного дефіциту в Україні стали спад виробництва, зниження ефективності функціонування галузей економіки і підприємств, не виважена соціально-економічна політика, що і зумовили спад обсягів валового внутрішнього продукту і національного доходу. Це природно спричинило зменшення обсягів фінансових ресурсів у державі і відобразилось на показниках бюджету у вигляді довгострокового дефіциту.
 Визначено залежність дефіциту бюджету від державного боргу. Встановлено, що існує тісний взаємозв’язок між розмірами бюджетного дефіциту і державного боргу. Бюджетний дефіцит збільшує державний борг, а зростання боргу, у свою чергу, потребує додаткових витрат бюджету на його обслуговування і тим самим збільшує бюджетний дефіцит.
 Установлено зв’язки дефіциту бюджету для економіки країни. Виявлено наслідки підвищення відсоткової ставки, що, з одного боку, знижує інвестиційну привабливість на внутрішньому ринку країни, з іншого – підвищує іноземну валютну привабливість фінансових інвестицій країни. Значні інвалютні потоки призводять до зростання боргової залежності країни і, як наслідок, – зростання курсу валют, скорочення чистого експорту товарів та зниження показників інвестиційної діяльності. Таке скорочення є причина зниження рівня продуктивності праці й реального доходу в усіх його формах, що провокує зниження довіри інвесторів, а отже, скорочення іноземних інвестиційних програм і виведення капіталу за кордон.
 Обґрунтовано шляхи подолання бюджетного дефіциту, що полягають у вдосконаленні податкової системи, залученні до інвестиційної сфери особистих заощаджень населення, забезпеченні фінансової підтримки малого та середнього бізнесу, посиленні відповідальності суб’єктів господарювання, зміцненні контролю за виплатою державних коштів, реформуванні видаткової системи, удосконаленні нормативно-правового забезпечення бюджетного процесу.
 Наукова новизна дослідження полягає в установленні причино-наслідкових зв’язків бюджетних дефіцитів для наукового обґрунтування бюджетного менеджменту в період структурних перетворень економіки.
 Практичним результатом є визначення шляхів реформування бюджетної системи України та її переходу до інвестиційної моделі.
 Перспективним напрямом подальших досліджень у цій сфері є розробка на основі причино-наслідкових зв’язків моделі бюджетного процесу, здатної виявити ризики дефіциту та мінімізувати їх вплив.

VRIO 모델 기반의 기업역량평가 프레임워크 제시에 관한 연구 - 플랜트 사업을 중심으로 -

Abstract : Construction enterprises have performed various projects such as buildings, infrastructure and plant projects in the international market. Among these, the plant project’s amount of orders accounted for about 68.9% of all. However, because of the enterprises won a contract with a low-budget for plant project in the last 10 years, the profit has dropped dramatically. And it is forecasted that there are extreme competition for bid award of plant projects because of the current falling oil prices and raising interest rates. In this circumstance, the comprehending of enterprises strength and weakness must be a priority to get a sustainable competitive advantage. Therefore this research suggests the enterprises’s capability assessment framework and it is in order to diagnose the korean construction enterprises capabilities. The framework is based on the VRIO model that is on the basis of resource based theory. First, the capability assessment indices and their importance and priority that based on the life-cycle of plant project is deducted by literature review and survey. Second, the 5 point likert score applied VRIO survey is conducted to diagnose the enterprises and quantified the survey result using the fuzzy theory. Lastly, the competitive implication and capability assessment are deducted.

The UK Economy

The UK economy is expected to grow by 2.0 per cent in 2016, down from the 2.3 per cent predicted in the February Review. Growth will pick up to 2.7 per cent in 2017.We expect the Bank of England to start raising interest rates in November. Rates will then continue rising throughout 2017, ending the year at 1.5 per cent.Although broadly unaffected in 2016, GDP is projected to be 1 per cent lower than our baseline forecast in 2017 if the UK votes to leave the European Union in next month's referendum. In the longer run, GDP is expected to be between 1.5 and 3.7 per cent lower than our baseline forecast.

The relationship between competition and risk-taking behaviour of Indian banks

Purpose Under the traditional franchise value paradigm, competition in banking markets is considered to be risk enhancing because of its tendency to raise interest rates on deposits. Taking a contrarian view, Boyd and De Nicolo (2005) have argued that competition in the loan market can lead to lower interest rates and hence reduce bank risk-taking. Following these contradictory theoretical results, the empirical evidence on the relationship between risk and competition in banking has also been mixed. This paper analyses the competition–stability relationship for the Indian banking sector for the period 1999-2000 to 2012-2013. Design/methodology/approach Banking competition is measured using structural measures of concentration, namely, five-bank concentration ratios and the Herfindahl-Hirschman Index as well as a non-structural measure of competition – the Panzar-Rosse H-Statistic. Panel regression methods are used to estimate the relationships. Findings Our results show that while concentration leads to lower levels of default, market and asset risks, it exacerbates the levels of capital and liquidity risks. Practical implications These results have interesting implications for banking sector policy in emerging economies. For instance, any strategy on entry of new banks has to be carefully coordinated with supervisory efforts and macro-prudential policy to derive the benefits of greater competition in the banking industry. Originality/value This is the first paper that analyses the competition – stability relationship using a large number of alternative measures for the banking sector, an emerging economy.

Credit-fuelled bubbles

We develop a model of credit-fuelled bubbles in which lenders accept risky assets as collateral. Asset prices and credit reinforce each other, as booming asset prices allow lenders to extend more credit, enabling investors to bid prices even higher. If investors are asymmetrically informed, there exist equilibria in which it is optimal to ride bubbles, buying overvalued assets in hopes of reselling at a profit to a greater fool. Lucky investors sell the bubbly asset at peak prices, only to buy it again at or below fundamental value after the crash. Unlucky investors, who buy at the peak hoping that the bubble continues to grow at least a bit longer, suffer losses. If the degree of leverage is sufficiently high, lenders repossess and liquidate the assets of unlucky investors, and may continue to seize their endowments until debts are fully repaid. In our model, raising interest rates and regulating maximal loan-to-value and loan-to-income ratios can reduce or even eliminate bubbles.

The Fed's Folly: Not Normalizing Rates Quickly After the Great Recession

For over seven years the Federal Reserve Bank has failed to foster a normal economic recovery in the aftermath of the 2008 financial crisis and Great Recession. By adhering to a zero interest-rate policy, as well as quantitative easing involving the infusion of credit through the purchase of trillions of dollars of government bonds and agency securities, economic performance has fallen far short of historical standards. A long-awaited 25 basis point hike in the federal funds rate in December 2015 is feckless. Chronic near-zero interest rates have forced a massive migration of capital to overvalued financial assets from traditional bank loans, deposits and money market instruments that traditionally fund the real economy. In addition, those rates have rendered bank net interest margins unprofitable resulting in restricted lending, mostly to the most credit-worthy borrowers at the expense of small businesses that create most jobs. Rock bottom rates aimed at stimulating growth through borrowing are not productive if they do not also motivate broad lending throughout the economy.This paper advocates a relatively rapid normalization of interest rates to restore equilibrium in the credit markets through a steady series of rate hikes. The action would redirect capital away from inflated stocks and bonds back to the production and consumption of goods and services that grow the economy. The particular fed fund rate that supports the movement of enough capital to achieve this may be about 4%., last registered in 2007. Heresy to traditionalists, few economists and analysts have called for such a solution out of fear of upsetting the financial markets and triggering a recession. Even the acclaimed “Taylor rule” that has guided monetary policy for more than 20 years understates the rate requirement under current anomalous monetary conditions. The consensus view does not consider that raising rates from near-zero would not have the adverse impact as raising them from historically normal levels might. Bold action is required to finally deflate the financial economy and reflate the real economy. In the process, the Fed has to resist short-term market disruptions and less than optimal economic data that heretofore have deterred rate hikes. And monetary ineffectiveness must not be excused on the ground of a “new normal” born of restrictive post-crisis financial regulation and ever-growing big government. Although impediments to growth, normalized interest rates can overcome them. In the early 1980s Fed Chairman Paul Volcker, in different economic circumstances, displayed the courage to take radical corrective action. His policy of sky-high interest rates to wring out hyperinflation initially precipitated a sharp recession but subsequently ushered in nearly uninterrupted expansion for almost 20 years.Once and for all the Fed should realize it has found itself in a hole from years of ineffectual policy. It’s time to stop digging. Sadly, of late the Fed is considering the opposite in flirting with negative interest rates that mimes the failure of other central banks. Counterintuitive as it may seem, raising interest rates to pre-crisis levels, coupled with fiscal and regulatory reform, would provide the stimulus that has been missing for too long.