A number of studies have found little evidence of the effect of the interest rate in dynamic IS curves. We show that this is due to de-trending. The interest rate has a weak effect on the output gap ...even when controlling for wealth effects. However, when the IS curve is formulated in an error-correction form, we find a significant interest rate effect. Furthermore, we find that the nominal interest rate explains output dynamics better. Lastly, there are significant effects of long-term interest rates in emerging markets, which may justify the use of yield curve control policies in these economies.
John Maynard Keynes asserted that the central bank sways the long-term interest rate through the influence of its policy rate on the short-term interest rate. Recent empirical research shows that ...Keynes's conjecture holds for long-term Treasury yields in the United States. This article investigates whether Keynes's claim also holds for the monthly changes in U.S.-dollar-denominated long-term swap yields by econometrically modeling its dynamics using an autoregressive distributed lag (ARDL) approach. The econometric modeling reveals that there is a statistically significant effect of the monthly changes in the Treasury bill rate on the monthly changes in swap yields of different maturity tenors after controlling for a host of macroeconomic and financial control variables. The findings from the econometric models that are estimated render a perspicacious Keynesian perspective on key policy questions and contemporary debates in macroeconomics and finance.
This study examines how the geopolitical oil price risk index, global gold price, global interest rate, and global exchange rate affect Islamic and conventional securities. For empirical estimation, ...this study has applied Quantile Autoregressive Distributive lag (QARDL) method on the monthly return of the Dow Jones conventional stock market index and Dow Jones Islamic Market World Index from January 2000 to November 2020. The primary variable of concern, geopolitical oil price risk, shows significant results for both securities under the bullish situation. Furthermore, under a bearish trend, the global exchange rate and the global interest rate of the Islamic stock market act in a similar direction. Although in conventional securities, both variables are significant in a bullish trend. The findings of this paper are important for investors and policymakers because this study provides a clear and comprehensive picture to shareholders in terms of their investments in Islamic or traditional markets. Moreover, it will open new opportunities for portfolio managers and speculators in Islamic and conventional stock markets.
•The role of geopolitical oil price risk, global gold prices, Global Interest rate and Global Exchange rate in explaining conventional/Islamic Stocks is investigated.•We applied Quantile Autoregressive Distributed Lags Errors Correction Model(QARDL).•The event of geopolitical oil price risk, Islamic stocks and traditional stocks response the same behaviour.•Given the geopolitical oil price risk, Islamic stocks and traditional stock securities are a good hedge.
This paper aims to propose referable asset allocation criteria for a defined-contribution (DC) pension plan under stochastic interest rates and the minimum guarantee of inflation protection on ...annuities. Motivated by the work of Litterman and Scheinkman (1991), which verifies that interest rate risks could be properly modeled with multiple factors, our proposed model extends the Jarrow and Yildirim (JY, 2003) model to a multi-factor framework, and simultaneously incorporates a stock asset to develop what is called the extended JY model in this study. The extended JY model can specify an economic environment with the consideration of risks arising from nominal and real interest rates, the CPI index (inflation rates), and the value of a stock portfolio, which facilitates to complete the closed-form solutions for the stochastic dynamic programming problem of a DC pension plan. The subsequent numerical experiment examines the allocative behaviors in an inflationary economy. In addition, the term effects among interest rates show to have a substantial impact on allocative decisions, and thus can be properly exploited to improve the final wealth of the pension fund.
Bank profitability and risk‐taking under low interest rates Bikker, Jacob A.; Vervliet, Tobias M.
International journal of finance & economics/International journal of finance and economics,
January 2018, 2018-01-00, 20180101, Volume:
23, Issue:
1
Journal Article
Peer reviewed
Open access
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.
•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.
Wealth Inequality in a Low Rate Environment Gomez, Matthieu; Gouin‐Bonenfant, Émilien
Econometrica,
January 2024, 2024-00-00, 20240101, Volume:
92, Issue:
1
Journal Article
Peer reviewed
Open access
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 studies how several macrofinancial factors are associated over time with the evolution of covered interest parity (CIP) deviations in the decade after the Global Financial Crisis. Changes ...in a number of risk- and policy-related factors have a significant association with the evolution of CIP deviations. Key measures of FX market liquidity and intermediaries' risk-taking capacity are strongly correlated with the cross-currency basis (the deviation from CIP), and the close relationship between broad U.S. dollar strength and the basis is driven mainly by a common factor depending on other safe-haven currencies' comovements. Post-crisis monetary policies also play a role, as demonstrated by the relationship between CIP deviations, central bank balance sheets, and term premia. Risk-related factors have more explanatory power than monetary policy-related factors over the entire 2010–2018 period, but they are approximately equally influential over the period's second half. Further highlighting the role of bank regulation, we offer evidence that the year-end dynamics of the three-month dollar basis depend on financial regulations targeting global systemically important financial institutions.
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