Motivated by the institutional features of China's monetary policy, this paper aims at identifying the most data favored monetary policy rule for China within a dynamic stochastic general equilibrium ...(DSGE) model framework. In a canonical New-Keynesian DSGE model, we carry out a positive analysis by employing Bayesian methods to estimate three main categories of monetary policy rules, namely a Taylor-type interest rate rule, a money growth rule and an expanded Taylor rule with money. Based on China's quarterly data from 1996Q2 to 2015Q4, our estimation shows that the expanded Taylor rule obtains the best empirical fit to the data. Moreover, impulse responses and forecast error variance decompositions demonstrate that monetary policy rules with or without money provide very different implications for the policy behavior. Our results ultimately suggest that money has so far been more closely targeted than nominal interest rate and still plays an important role as a monetary policy target in China. Furthermore, a conventional Taylor-type interest rate rule is not good enough yet to describe China's monetary policy behavior.
•Taylor rule expanded with money fits Chinese data much better than a conventional Taylor rule.•Policy rules with or without money provide very different implications for China's monetary policy.•Money should be an indispensable policy target when a monetary policy rule is chosen for China.•Our results help to establish consensus on the simple monetary policy rule for China.•Our results provide some rationale of DSGE models used to evaluate China's monetary policy.
The aim of this paper is to investigate the impact of the unusually low interest rate environment on the soundness of the United States banking sector in terms of profitability and risk‐taking. Using ...both dynamic and static modelling approaches and various estimation techniques, we find that the low interest rate environment indeed impairs bank performance and compresses net interest margins. Nonetheless, banks have been able to maintain their overall level of profits, due to lower provisioning, which in turn may endanger financial stability. Banks did not compensate for their lower interest income by expanding operations to include trading activities with a higher risk exposure.
This paper investigates whether the real interest rate parity (RIRP) is valid during the three waves of globalizations that occurred in the last 150 years (1870–1914, 1944–1971, 1989 to the present). ...If any, these periods should favor RIRP, since globalization is a process where economies and financial markets become increasingly integrated into a global economic system. In contrast to the existing literature, we model the departures from RIRP as a long-term memory process and apply fractional integration methods on a sample of real interest rate differentials of seven developed countries: France, Germany, Holland, Italy, Japan, Spain, and the UK across the three globalization waves paired against the USA. We compute impulse response functions (IRF) to gain further insight into the memory characteristics of the RIRP differential processes and provide half-life estimates. We find that deviations from RIRP are mean reverting, providing robust evidence of real interest rate convergence during the three globalization waves. We shed further light on financial and commodity market integration during the three globalization waves by assessing the memory properties of uncovered interest rate parity (UIP) and relative purchasing power parity (PPP) differential processes. We find that deviations from relative PPP and UIP are not always mean-reverting processes. RIRP, relative PPP, and UIP hold simultaneously only in 7 out of 21 cases; RIRP and UIP hold in 11 out of 21 cases; RIRP hold without the support of relative PPP and UIP in 3 out of 21 cases. Thus, the evidence in favor of real interest rate convergence appears to be driven more by UIP than relative PPP. All these results are, to the authors knowledge, new to the literature.
Online crowdfunding holds the promise of empowering entrepreneurs and small businesses as an innovative alternative financing channel. However, doubts have been expressed as to whether online ...crowdfunding can deliver its promise because of the lack of empirical evidence regarding its effects. In this study, we investigate the effects that prosocial crowdfunding has on traditional microfinance institutions (MFIs). Combining multiple data sources, including data from Kiva.org and the Microfinance Information Exchange Market (MIX Market), we examine how access to crowdfunding influences MFIs’ sustainability and interest rates. We find that after joining Kiva, MFIs’ sustainability improves and interest rates decrease. Further investigation suggests that the changes mainly result from efficiency improvement, rather than increased supply of low-cost funds. We propose that joining an online crowdfunding platform induces greater transparency and crowd monitoring, which motivates and empowers MFIs to improve operations and become more efficient.
•We study asymmetric interest rate pass-through in the U.S., the U.K. and Australia.•The paper uses the Nonlinear Auto-Regressive Distributed Lag model.•It tests pass-through between policy rates and ...rates from selected banks.•The results support the asymmetric pass-through market predictions.•Asymmetric pass-through is retained after the crisis only in Australia.
This paper provides new evidence on asymmetric interest rate pass-through in the U.S., the U.K. and the Australian economies by using the Nonlinear Auto-Regressive Distributed Lag model, central bank interest rates, lending and deposit interest rates from selected banks, spanning the period 2000–2013. The results provide evidence that corroborates the asymmetric pass-through market predictions. Robustness tests are also performed by splitting the sample period into that prior to and after the recent financial crisis. The new findings document that the asymmetric character of pass-through remains active only in the case of Australia.
We analyzed rationality, content, and anchoring of the monetary policy interest rate expectations (for 3, 6, 9, and 12 months ahead), taking into account the Brazilian data from January 2003 to July ...2020. We consider expectations based on two perspectives: expectations gathered from a Taylor rule and market expectations obtained from the survey carried out by the central bank. The findings point out that, concerning rationality and anchoring, the interest rate expectations based on a Taylor rule performed better than expectations from the Central Bank of Brazil's (CBB) survey, even when we consider the Top 5 forecasters. Moreover, our analysis shows that the content of monetary policy interest rate expectations based on a Taylor rule and CBB's survey (including Top 5 forecasters) is different. Thus, they may be seen as complementary sources of information on the future interest rate. Concerning anchoring of the monetary policy interest rate expectations, the CBB's survey expectations are not anchored, while the result for the expectations based on a Taylor rule shows the opposite for horizons up to 9 months ahead.
Wealth Inequality in a Low Rate Environment Gomez, Matthieu; Gouin‐Bonenfant, Émilien
Econometrica,
January 2024, 2024-00-00, 20240101, Letnik:
92, Številka:
1
Journal Article
Recenzirano
Odprti dostop
We study the effect of interest rates on wealth inequality. While lower rates decrease the growth rate of rentiers, they also increase the growth rate of entrepreneurs by making it cheaper to raise ...capital. To understand which effect dominates, we derive a sufficient statistic for the effect of interest rates on the Pareto exponent of the wealth distribution: it depends on the lifetime equity and debt issuance rate of individuals in the right tail of the wealth distribution. We estimate this sufficient statistic using new data on the trajectory of top fortunes in the U.S. Overall, we find that the secular decline in interest rates (or more generally of required rates of returns) can account for about 40% of the rise in Pareto inequality; that is, the degree to which the super rich pulled ahead relative to the rich.
Empirical evidence suggests financial intermediaries increase risky investments when interest rates are low. We develop a model consistent with this observation and ask whether the risks undertaken ...exceed the social optimum. Interest rate policy affects risk taking in the model through two opposing channels. First, low policy rates make riskier assets more attractive than safe bonds. Second, low policy rates reduce the amount of safe bonds available for collateralized borrowing in interbank markets. The calibrated model features excessive risk taking at the optimal policy. However, at low policy rates, collateral constraints tighten and risk taking does not exceed the social optimum.
This paper examines whether firms are hedging or timing the market when selecting the interest rate exposure of their new debt issuances. I use a more accurate measure of the interest rate exposure ...chosen by firms by combining the initial exposure of newly issued debt securities with their use of interest rate swaps. The results indicate that the final interest rate exposure is largely driven by the slope of the yield curve at the time the debt is issued. These results suggest that interest rate risk management practices are primarily driven by speculation or myopia, not hedging considerations.
The interest rate pass‐through describes how changes in a reference rate (the monetary policy, money market or T‐bill rate) transmit to bank lending rates. We review the empirical literature on the ...interest rate pass‐through and systematize it by means of meta‐analysis and meta‐regressions. Using the pass‐through to corporate lending rates as the baseline, we find systematically lower estimated pass‐through coefficients in studies that focus on the pass‐through to consumer lending rates and rates on long‐term loans. Also studies estimating the pass‐through by averaging all lending rates into one category report a lower pass‐through. Importantly, the interest rate pass‐through is significantly influenced by the country's macro‐financial environment. In economies with deepening stock markets, the estimated pass‐through strengthens significantly. Interestingly, after the global financial crisis, the pass‐through weakened across the board, including because of growing trade openness and supply chain financing, rising volatility and stock market turnovers, as well as declining central bank independence. Inflation targeting frameworks, if in place, helped diminish this pass‐through weakening.
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