Nominal Interest Rates (nominal + interest_rate)

Distribution by Scientific Domains


Selected Abstracts


Why Do Firms Raise Foreign Currency Denominated Debt?

EUROPEAN FINANCIAL MANAGEMENT, Issue 4 2001
Evidence from Finland
This study examines the determinants of the decision to raise currency debt. The results suggest that hedging figures importantly in the currency,of,denomination decision: firms in which exports constitute a significant fraction of net sales are more likely to raise currency debt. However, firms also tend to borrow in periods when the nominal interest rate for the loan currency, relative to other currencies, is lower than usual. This is consistent with the currency debt issue decision being affected by speculative motives. Large firms, with a wider access to the international capital markets, are more likely to borrow in foreign currencies than small firms. [source]


A Speed Limit Monetary Policy Rule for the Euro Area,

INTERNATIONAL FINANCE, Issue 1 2007
Livio StraccaArticle first published online: 5 APR 200
The main task of central banks is to set the level of short-term nominal interest rates in reaction to economic developments, with the aim of achieving their statutory objectives (typically some combination of inflation and output variability). If agents are forward-looking, central banks can achieve better macroeconomic outcomes by committing to follow a rule-like behaviour. Against this background, the contribution of this paper is twofold. First, it estimates a small-scale model of the euro area economy that can be used as a benchmark for the evaluation of different simple policy rules in the euro area economy. Second, it studies the performance of a relatively new type of rule, labelled ,speed limit' (SL), where the nominal interest rate reacts to the rate of growth in the output gap. The main conclusion of the study is that an SL policy performs remarkably well. [source]


Monetary Policy in a World Without Money

INTERNATIONAL FINANCE, Issue 2 2000
Michael Woodford
This paper considers whether the development of ,electronic money' poses any threat to the ability of central banks to control the value of their national currencies through conventional monetary policy. It argues that, even if the demand for base money for use in facilitating transactions is largely or even completely eliminated, monetary policy should continue to be effective. Macroeconomic stabilization depends only upon the ability of central banks to control a short-term nominal interest rate, and this would continue to be possible, in particular through the use of a ,channel' system for the implementation of policy, like those currently used in Canada, Australia and New Zealand. [source]


Macroeconomic Control in the Transforming Chinese Economy: An Analysis of the Long-Run Effect

PACIFIC ECONOMIC REVIEW, Issue 1 2001
Michael K. Y. Fung
This paper analyzes the issue of macroeconomic control in the Chinese economy where there is a dual structure (consisting of a state sector and a non-state sector) and the financial sector is still under tight control by the government. Given the dual structure and financial repression, when inflation is a severe problem, the authors investigate whether it is possible for the government to bring inflation under control without hampering long-term economic growth performance. The investigation is conducted within the context of an endogenous growth model that incorporates the two major institutional features of the transforming Chinese economy. The paper evaluates the long-run effects of changes in government monetary and fiscal policies on the major macroeconomic aggregates. The analysis suggests that increasing in the interest rate on government bonds will reduce inflation without affecting the growth rate of output; while increasing the nominal interest rate on bank deposits will exert a stagflationary effect on the economy: raising the inflation rate but reducing the growth rate of output. [source]


Overcoming the zero bound on nominal interest rates with negative interest on currency: gesell's solution,

THE ECONOMIC JOURNAL, Issue 490 2003
Willem H. Buiter
The paper considers two small analytical models, one Old-Keynesian, the other New-Keynesian, possessing equilibria where nominal interest rates at all maturities can be stuck at their zero lower bound. When the authorities remove the zero nominal interest rate floor by adopting an augmented monetary rule that systematically keeps the nominal interest rate on base money at or below the nominal interest rate on non-monetary instruments, the lower bound equilibria are eliminated, thus allowing an economic system to avoid or escape from the trap. This involves paying negative interest on currency, ie, imposing a ,carry tax' on currency, an idea first promoted by Gesell. [source]


MONETARY POLICY DURING JAPAN'S LOST DECADE,

THE JAPANESE ECONOMIC REVIEW, Issue 2 2006
R. ANTON BRAUN
We develop a quantitative costly price adjustment model with capital formation for the Japanese economy. The model respects the zero interest rate bound and is calibrated to reproduce the nominal and real facts from the 1990s. We use the model to investigate the properties of alternative monetary policies during this period. The setting of the long-run nominal interest rate in a Taylor rule is much more important for avoiding the zero bound than the setting of the reaction coefficients. A long-run interest rate target of 2.3% during the 1990s avoids the zero bound and enhances welfare. [source]


Money Demand in an EU Accession Country: A VECM Study of Croatia

BULLETIN OF ECONOMIC RESEARCH, Issue 2 2006
Dario Cziráky
O42; E13; E41; E51 Abstract The paper estimates the money demand in Croatia using monthly data from 1994 to 2002. A failure of the Fisher equation is found, and adjustment to the standard money-demand function is made to include the inflation rate as well as the nominal interest rate. In a two-equation cointegrated system, a stable money demand shows rapid convergence back to equilibrium after shocks. This function performs better than an alternative using the exchange rate instead of the inflation rate as in the ,pass-through' literature on exchange rates. The results provide a basis for inflation rate forecasting and suggest the ability to use inflation targeting goals in transition countries during the EU accession process. Finding a stable money demand also limits the scope for central bank ,inflation bias'. [source]


The Transmission of US Monetary Policy to the Euro Area,

INTERNATIONAL FINANCE, Issue 1 2010
Stefano Neri
This paper studies how changes in the federal funds rate by the US Federal Reserve affect the eurozone economy. In our analysis, the international transmission mechanism works through movements in the exchange rate, commodity prices, short-term interest rates and the trade balance. We find that an increase in the federal funds rate causes the euro to immediately depreciate, while commodity, and in particular oil, prices decline sharply, reflecting a decline in demand. Lower commodity prices stimulate household consumption in the short run, and the higher aggregate demand induces an expansion of eurozone economic activity. Our results show that the effects of changes in the federal funds rate on commodity prices are greater than previously found in the literature. Our analysis also assesses the likely effects on the eurozone economy of the European Central Bank's (ECB's) own responses to macroeconomic developments. We find that the expansionary effect of lower commodity prices and a depreciated euro on the eurozone economy is partially offset by the ECB increasing short-term nominal interest rates to curb inflationary pressures in an expanding economy. This result highlights the importance of commodity prices and the euro,dollar exchange rate as inputs into European monetary policy-making, as seen, for example, in the Eurosystem staff macroeconomic projections used by the Governing Council to assess the risks to price stability. [source]


A Speed Limit Monetary Policy Rule for the Euro Area,

INTERNATIONAL FINANCE, Issue 1 2007
Livio StraccaArticle first published online: 5 APR 200
The main task of central banks is to set the level of short-term nominal interest rates in reaction to economic developments, with the aim of achieving their statutory objectives (typically some combination of inflation and output variability). If agents are forward-looking, central banks can achieve better macroeconomic outcomes by committing to follow a rule-like behaviour. Against this background, the contribution of this paper is twofold. First, it estimates a small-scale model of the euro area economy that can be used as a benchmark for the evaluation of different simple policy rules in the euro area economy. Second, it studies the performance of a relatively new type of rule, labelled ,speed limit' (SL), where the nominal interest rate reacts to the rate of growth in the output gap. The main conclusion of the study is that an SL policy performs remarkably well. [source]


Monetary Policy and the Taylor Principle in Open Economies

INTERNATIONAL FINANCE, Issue 3 2006
Ludger Linnemann
Nowadays, central banks mostly conduct monetary policy by setting nominal interest rates. A widely held view is that central banks can stabilize inflation if they follow the Taylor principle, which requires raising the nominal interest rate more than one-for-one in response to higher inflation. Is this also correct in an economy open to international trade? Exchange rate changes triggered by interest rate policy might interfere with inflation stabilization if they alter import prices. The paper shows that this destabilizing effect can prevail if (a) the central bank uses consumer (rather than producer) prices as its inflation indicator or directly reacts to currency depreciation, and (b) if it bases interest rate decisions on expected future inflation. Thus, if the central bank looks at current inflation rates and ignores exchange rate changes, Taylor-style interest rate setting policies are advisable in open economies as well. [source]


Interest rate rules and global determinacy: An alternative to the Taylor principle

INTERNATIONAL JOURNAL OF ECONOMIC THEORY, Issue 4 2009
Jean-Pascal Bénassy
E43; E52; E58; E62; E63 A well-known determinacy condition on interest rate rules is the "Taylor principle," which states that nominal interest rates should respond more than 100 percent to inflation. Unfortunately, notably because interest rates must be positive, the Taylor principle cannot be satisfied for all interest rates, and as a consequence global determinacy may not prevail even though there exists a locally determinate equilibrium. We propose here a simple alternative to the Taylor principle, which takes the form of a new condition on interest rate rules that ensures global determinacy. An important feature of the policy package is that it does not rely at all on any of the fiscal policies associated with the "fiscal theory of the price level," which has so far been the main alternative for determinacy. [source]


The New Keynesian Model and the Euro Area Business Cycle,

OXFORD BULLETIN OF ECONOMICS & STATISTICS, Issue 2 2007
Miguel Casares
Abstract This paper describes a New Keynesian model incorporating transactions-facilitating money and a time-to-build constraint into endogenous capital accumulation. The calibrated New Keynesian model performs almost as well as the estimated vector autoregressive model in replicating Euro area cyclical correlations between key variables such as output and inflation, although it fares less well in predicting the procyclical dynamics of nominal interest rates. The presence of a time-to-build requirement in the model helps to improve its fit to Euro area data, whereas the role of transactions-facilitating money is much less important. Impulse,response functions and a decomposition of variance complete the analysis. [source]


Mean Reversion of Interest Rates in the Eurocurrency Market

OXFORD BULLETIN OF ECONOMICS & STATISTICS, Issue 4 2001
Jhy-Lin Wu
One stylised fact to emerge from the empirical analysis of interest rates is that the unit-root hypothesis in nominal interest rates cannot be rejected. However, using the panel date unit-root test IM, Pesaran and Shin (1997), we find support for the mean-reverting property of Eurocurrency rates. Thus, neither a vector-error-correction model nor a vector autoregressive model in differences is appropriate for modelling Eurocurrency rates. Instead, conventional modelling strategies with level data are appropriate. Furthermore, the finding of stationary interest rates supports uncovered interest parity, and hence the convergence hypothesis of interest rates. This in turn suggests a limited role for a monetary authority to affect domestic interest rates. [source]


Overcoming the zero bound on nominal interest rates with negative interest on currency: gesell's solution,

THE ECONOMIC JOURNAL, Issue 490 2003
Willem H. Buiter
The paper considers two small analytical models, one Old-Keynesian, the other New-Keynesian, possessing equilibria where nominal interest rates at all maturities can be stuck at their zero lower bound. When the authorities remove the zero nominal interest rate floor by adopting an augmented monetary rule that systematically keeps the nominal interest rate on base money at or below the nominal interest rate on non-monetary instruments, the lower bound equilibria are eliminated, thus allowing an economic system to avoid or escape from the trap. This involves paying negative interest on currency, ie, imposing a ,carry tax' on currency, an idea first promoted by Gesell. [source]


The pricing of foreign currency options under jump-diffusion processes

THE JOURNAL OF FUTURES MARKETS, Issue 7 2007
Chang Mo Ahn
In this article, the authors derive explicit formulas for European foreign exchange (FX) call and put option values when the exchange rate dynamics are governed by jump-diffusion processes. The authors use a simple general equilibrium international asset pricing model with continuous trading and frictionless international capital markets. The domestic and foreign price level are introduced as state variables that contain jumps caused by monetary shocks and catastrophic events such as 9/11 or Hurricane Katrina. The domestic and foreign interest rates are stochastic and endogenously determined in the model and are shown to be critically affected by the jump risk of the foreign exchange. The model shows that the behavior of FX options is affected through the impact of state variables and parameters on the nominal interest rates. The model contrasts with those of M. Garman and S. Kohlhagen (1983) and O. Grabbe (1983), whose models have exogenously determined interest rates. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:669,695, 2007 [source]


INDEPENDENCE DAY FOR THE ,OLD LADY': A NATURAL EXPERIMENT ON THE IMPLICATIONS OF CENTRAL BANK INDEPENDENCE,

THE MANCHESTER SCHOOL, Issue 3 2007
JAGJIT S. CHADHA
Central bank independence is widely thought be a sine qua non of a credible commitment to price stability. The surprise decision by the UK government to grant operational independence to the Bank of England in 1997 affords us a natural experiment with which to gauge the impact on the yield curve from the adoption of central bank independence. We document the extent to which the decision to grant independence was ,news' and illustrate that the reduction in medium- and long-term nominal interest rates was some 50 basis points, which we show to be consistent with a sharp increase in policy-maker's aversion to inflation deviations from target. We therefore suggest that central bank independence represents one of the clearest signals available to elected politicians about their preferences on the control of inflation. [source]


The Functional Form Of The Demand For Euro Area M1

THE MANCHESTER SCHOOL, Issue 2 2003
Livio Stracca
A remarkable development seen in recent years is the pronounced decline in euro area M1 velocity vis,ŕ,vis a moderate decline in short,term interest rates, which represent the most natural opportunity cost for M1, suggesting an increase in the interest rate elasticity of M1 demand. In fact, estimating a theoretically plausible and stable demand function for M1 in the euro area is possible if a functional form of money demand allowing for an interest rate elasticity decreasing in size with the level of the interest rate is imposed. This finding would apparently suggest that the decline in inflation and nominal interest rates in Europe experienced in the run,up to the euro should have ,naturally' brought about an increased degree of preference for liquidity without any fundamental change in agents' preferences. To test the validity of this conclusion, a time,varying parameters model is estimated through a Kalman filter on the level of real M1, which is able to test simultaneously the stability of the parameters and the functional form of the demand for euro area M1. In this case, results clearly suggest the double,log function to be very close to the true ,deep' functional form of M1 demand in the euro area, consistent with the findings of Chadha, Haldane and Janssen for the UK and of Lucas for the USA. At the same time, there is evidence of an increased interest rate elasticity in M1 demand in the most recent years, presumably associated with the transition to the new environment prevailing from the start of Stage Three of European Monetary Union. [source]


A Note on Modelling Money Demand in Growing Economies

BULLETIN OF ECONOMIC RESEARCH, Issue 1 2001
Parantap Basu
A prominent feature of US data is the lack of cointegration between nominal interest rates and M1 velocity. Yet, most general-equilibrium monetary models that have been used for empirical analysis have imposed cointegration between these two series. This paper presents as an alternative a money-in-the-utility function model which does not imply cointegration even though a well-defined stationary monetary equilibrium exists. [source]