Euler equations and money market interest rates: The role of monetary policy and risk premium shocks

Summary Understanding the factors determining overnight rates is crucial both for central bankers and private market participants, since, assuming the validity of the expectation theory of the term structure of interest rates, expectations with regard to this “monadic” maturity should determine longer term rates, which are deemed to be relevant for the transmission of monetary policy. The note proposes a simple model of the money market within a two-day long reserve maintenance period to derive relationships between the relevant quantities, expectations concerning these quantities for the rest of the reserve maintenance period, and overnight rates. It is argued that a signal extraction problem faced by banks when observing quantities such as their aggregate reserve holdings and allotment amounts of monetary policy operations is at the core of these relationships. The usefulness of the model is illustrated by applying it to the analysis of three alternative liquidity management strategies of a central bank.

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Sukuk and monetary policy transmission in Indonesia: the role of asset price and exchange rate channels

Journal of Islamic Accounting and Business Research ◽

10.1108/jiabr-09-2019-0177 ◽

2021 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Suriani Suriani ◽

M. Shabri Abd. Majid ◽

Raja Masbar ◽

Nazaruddin A. Wahid ◽

Abdul Ghafar Ismail

Keyword(s):

Monetary Policy ◽

Exchange Rate ◽

Interest Rates ◽

Asset Price ◽

Transmission Mechanism ◽

Monetary Policy Transmission ◽

Content Type ◽

Policy Transmission ◽

Monetary Policy Transmission Mechanism

Purpose The purpose of this study is to empirically analyze the role of sukuk in the monetary policy transmission mechanism through the asset price and exchange rate channels in the Indonesian economy. Design/methodology/approach Using the monthly data from January 2003 to November 2017, this study uses a multivariate vector error correction model causality framework. To examine the role of sukuk in the monetary policy transmission mechanism through the asset price channel, this study uses the variables of consumption, inflation, interest rates, economic growth and the composite stock price index. Meanwhile, to examine the role of sukuk in the monetary policy transmission mechanism through the exchange rate channel, this study used variables of inflation, interest rates, economic growth, foreign investment and exchange rate. Findings This study documented that sukuk has no causal relationship with inflation through asset price and exchange rate channels. Nevertheless, sukuk has a bidirectional causal relationship with economic growth through asset price and exchange rate channels. Sukuk is also documented to have a causal relationship with monetary policy variables of interest rate and stock prices through asset price and exchange rate channels. Finally, a unidirectional causality is recorded running from the exchange rate to sukuk in the exchange rate channel. Research limitations/implications The finding of independence of the sukuk market from interest rates provides evidence that the trading of the sukuk in Indonesia has been in harmony with the Islamic tenets. Practical implications The relevant Indonesian authorities need to enhance both domestic and global sukuk markets as part of efforts to promote the sustainability of Islamic capital market development in Indonesia. Originality/value To the best of the authors’ knowledge, this study is among the first attempts to empirically investigate the role of sukuk in monetary policy transmission through asset price and exchange rate channels in the context of the Indonesian economy.

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The Role of Monetary Policy in Dealing With Inflation and High Interest Rates

10.20955/r.56.2-9.qnm ◽

1974 ◽

Vol 56 ◽

Author(s):

Darryl R. Francis

Keyword(s):

Monetary Policy ◽

Interest Rates ◽

High Interest

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ASYMMETRIC TRANSMISSION OF MONETARY POLICY TO INTEREST RATES: EMPIRICAL EVIDENCE FROM INDONESIA

Buletin Ekonomi Moneter dan Perbankan ◽

10.21098/bemp.v24i1.1201 ◽

2021 ◽

Vol 24 (1) ◽

pp. 119-150

Author(s):

Fitri Ami Handayani ◽

Febrio Nathan Kacaribu

Keyword(s):

Monetary Policy ◽

Interest Rates ◽

Money Market ◽

Asymmetric Transmission ◽

Correction Model ◽

Monthly Data ◽

Policy Transmission ◽

Pricing Behavior ◽

Lending Rates ◽

Transmission Of Monetary Policy

This study investigates monetary policy transmission to the interest rates in Indonesia, focusing on changes in pricing behavior that may have occurred after the shift of benchmark policy rates in August 19, 2016. We analyzed monthly data on money market, deposit, and lending rates from November 2011 to December 2019. Two specifications of the error correction model capture asymmetric adjustments. We find that the new policy rate regime has improved the response of money market rates. However, the rigidity of bank retail rates has increased. Specifically, lending rates have become more rigid upwards, as lenders have become more responsive to monetary easing than to monetary tightening.

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Multidimensional Assessment of Economies by the Level of Sovereign Risk Premium

Moscow University Economics Bulletin ◽

10.38050/01300105202021 ◽

2020 ◽

Vol 2020 (2) ◽

pp. 3-27

Author(s):

Sergey Drobyshevsky ◽

Pavel Trunin ◽

Lyudmila Gadiy ◽

Mariya Chembulatova

Keyword(s):

Monetary Policy ◽

Risk Premium ◽

International Market ◽

Developed Countries ◽

Credit Default Swaps ◽

Sovereign Risk ◽

Political Risks ◽

Credit Default ◽

Monetary Authorities

The analysis of the international market for credit default swaps (CDS) shows that the interdependence of sovereign CDS spreads is increasing and the market remains segmented. However, the reduction in the variation of sovereign CDS spreads means increased competition for capital and should be taken into account by monetary authorities of developed countries when they tighten monetary policy. The article shows a significant role of political risks in determining the level of sovereign risk.

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Risk Premia and the Real Effects of Money

The American Economic Review ◽

10.1257/aer.20180203 ◽

2020 ◽

Vol 110 (7) ◽

pp. 1995-2040 ◽

Cited By ~ 1

Author(s):

Sebastian Di Tella

Keyword(s):

Interest Rates ◽

Risk Premium ◽

Risk Sharing ◽

Optimal Allocation ◽

Price Theory ◽

The Real ◽

Friedman Rule ◽

Real Effects ◽

Tax Subsidy

This paper proposes a flexible-price theory of the role of money in an economy with incomplete idiosyncratic risk sharing. When the risk premium goes up, money provides a safe store of value that prevents interest rates from falling, reducing investment. Investment is too high during booms when risk is low, and too low during slumps when risk is high. Monetary policy cannot correct this: money is superneutral and Ricardian equivalence holds. The optimal allocation requires the Friedman rule and a tax/subsidy on capital. The real effects of money survive even in the cashless limit. (JEL E32, E41, E43, E44, E52)

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ROMANIAN INTERBANK INTEREST RATES AND CENTRAL BANK’S MONETARY POLICY

Scientific Annals of Economics and Business ◽

10.47743/saeb-2019-0042 ◽

2019 ◽

Vol 66 (4) ◽

pp. 487-506

Author(s):

Giovanni Verga ◽

Nicoleta Vasilcovschi

Keyword(s):

Monetary Policy ◽

Central Bank ◽

Interest Rates ◽

Central Banks ◽

The European Union ◽

European System ◽

National Bank ◽

Lending Rates ◽

Main Determinants

Interbank rates are affected by the monetary policy of a country and represent a link to other financial and credit markets. In 2007, Romania became a member of the European Union and its central bank, the National Bank of Romania (NBR), joined the European System of Central Banks (ESCB) but not the Eurosystem. This paper analyses the role of the central bank and the use of its instruments concerning interbank rates. The research evaluates the influence of the Romanian Central Bank on interbank rates and shows that the policy rate and bank liquidity are among the main determinants of interbank rate movements. It is also presented that the NBR’s deposit and lending rates can limit the free movements of the interbank rate of interest. This research confirms that interbank interest rates influence bank rates strongly. The methodology used in this research includes cointegration, dynamic econometric measurement and analyses with Granger causality. Our research uses mainly ROBID and ROBOR of different maturities, showing that the influence of the Romanian Central Bank (NBR) on the interbank rate is strong, while the influence of the ECB and Fed is weak.

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Testes da Hipótese de Expectativas na Estrutura a Termo das Taxas de Juros Brasileiras

Brazilian Review of Finance ◽

10.12660/rbfin.v1n1.2003.1124 ◽

2003 ◽

Vol 1 (1) ◽

pp. 19

Author(s):

Benjamin Miranda Tabak ◽

Sandro Canesso de Andrade

Keyword(s):

Monetary Policy ◽

Interest Rates ◽

Term Structure ◽

Risk Premium ◽

Rational Expectations ◽

Yield Curve ◽

Single Equation ◽

Expectations Hypothesis ◽

Macro Modeling ◽

Daily Data

We test the Expectations Hypothesis (EH) plus Rational Expectations (RE) in the Brazilian term-structure of interest rates, using maturities ranging from 1 month to 12 months, and daily data from 1995 to 2000. We rely on two methodologies based on single-equation regressions. Our results indicate a rejection of the EH plus RE, specially at the longer maturity. This may have important implications for the rational expectations macro-modeling currently being used to evaluate the conduct of monetary policy in Brazil. We also show the risk premium in the yield curve are positively related to the covered interest rate differential and to the volatility of interest rates.

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Taxation and the Public Services

The Culture of Contentment ◽

10.23943/princeton/9780691171654.003.0004 ◽

2017 ◽

Author(s):

John Kenneth Galbraith

Keyword(s):

Monetary Policy ◽

Interest Rates ◽

Public Services ◽

Macroeconomic Policy ◽

The Other ◽

Public Expenditures ◽

The Public ◽

The One ◽

The Relationship

This chapter examines the role of taxation in the culture of contentment. In the age of contentment, macroeconomic policy has come to center not on tax policy but on monetary policy. Higher interest rates, it is hoped, will curb inflation without posing a threat to people of good fortune. Those with money to lend, the economically well-endowed rentier class, will thus be rewarded. The chapter first considers the role of monetary policy in the entirely plausible and powerfully adverse attitude toward taxation in the community of contentment before discussing the relationship between taxation and public services, and between taxation and public expenditures. It shows that public services and taxation have disparate effects on the Contented Electoral Majority on the one hand, and on the less affluent underclass on the other.

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