Abstract: The Macroeconomic Effects of Allowing Interest Payment on Demand Deposits

1977 ◽  
Vol 12 (4) ◽  
pp. 647-647
Author(s):  
Peter Lloyd-Davies
Keyword(s):  
Interest Rates ◽  
Excess Demand ◽  
Costs And Benefits ◽  
Demand For Money ◽  
Interest Payment ◽  
On Demand ◽  
Demand Deposits ◽  
Short Run ◽  
Macroeconomic Effects ◽  
The Interest Rate

This papaer assesses some of the costs and benefits of aloowing banks to pay interest on demand deposits. With the help of a simple short-run model of the financial sector, it is shown that, barring a possible but unlikely perverse reaction, the deposit rate will tend to move in the same direction as other rates. This will moderate changes in the money supply accompanying a given change in interest rates; conversely, a given change in the excess demand for money will cause larger fluctuations in the level of interest rates. This can either be good or bad; if the excess demand for money corresponds to an excess demand for real output, the wider fluctuations in the interest rate will be more effective in eliminating it.

scholarly journals PERILAKU PERMINTAAN UANG DALAM SISTEM MONETER GANDA DI INDONESIA

2008 ◽  
Vol 11 (1) ◽  
Author(s):  
Ascarya Ascarya ◽  
Heni Hasanah ◽  
Noer Azam Achsani
Keyword(s):  
Money Demand ◽  
Conventional System ◽  
Demand For Money ◽  
Monetary System ◽  
Time Deposit ◽  
Demand Deposit ◽  
Demand Deposits ◽  
Demand Variation ◽  
The Interest Rate ◽  
Saving Deposit

The cotemporary dual monetary system is characterized by an interest system in conventional system and the profit-and-loss sharing (PLS) system in Islamic system, where each of them has a different behavior in influencing the money demand and the monetary stability. This study analyses the components of money demand under both the conventional and Islamic financial system in Indonesia, using a Vector Auto Regression (VAR) and Vector Error Correction Model (VECM) methods.The results show that in Islamic system, PLS return negatively correlated with all Islamic demand for money components (currency, Wadiah demand deposit, Mudharabah saving deposit, and Mudharabah time deposit). While in conventional system, interest is negatively correlated with the demand for currency, the demand deposit, and the saving deposit, but positively correlated with the demand for time deposit. The Islamic demand for money stabilizes quiclier to respons the shock from other variables compare to conventional system. Moreover, the interest rate contributes 20%-29% in the conventional demand for money variation, while in PLS system the return almost has no role on Islamic money demand variation. Our research also shows that the savings deposits in Indonesia have the characteristics of the demand deposits, hence preferably included in M1 instead of in M2.These findings suggest the monetary authority to gradually shift their mindset from the conventional monetary operation to the dual monetary operation and explore further the possibility of using PLS return as the “policy rate” benchmark to achieve the principal objectives in maximizing distributive social welfare and justice, as well as minimizing inefficiency.JEL Classification: C32, E31, E41, E52Keywords: Permintaan Uang Konvensional, Permintaan Uang Islam, Sistem Keuangan/Perbankan Ganda, VAR/VECM

scholarly journals Money Demand Function for Nepal: An Empirical View from Expenditure Component

2019 ◽  
pp. 12-25
Author(s):  
Pujan Adhikari
Keyword(s):  
Interest Rate ◽  
Money Demand ◽  
Capital Formation ◽  
Consumption Expenditure ◽  
Demand For Money ◽  
Final Consumption ◽  
On Demand ◽  
Long Run ◽  
Fixed Capital Formation ◽  
Short Run

This paper examines the long run and short-run dynamics relationship between broad money, consumption expenditure, capital stock and interest rate in Nepal over the period of 1975-2017. This paper employs ARDL bound testing approach for co-integration between the broad money demand and its determinants. Result reveals the evidence of cointegration among the variables. The empirical results show that the demand for money is affected by the interest rate and final consumption expenditure both in the long run and short-run. However, the gross fixed capital formation has no impact on demand for money in the long-run and short-run as well. On contrast, interest rate is positively associated with Broad money demand, which is not consistent with theoretically. Positive association of money demand with interest rate shows that demand for money function is instability in Nepal. Thus, this study suggests that policy maker to correct price fluctuation through the control of various expenditure components, particularly, real final consumption expenditure might be an important strategy in the long run. However, the gross fixed capital formation has no impact on demand for money in the long-run.

scholarly journals Do Exchange Rate Changes Have Asymmetric or Symmetric Effects on the Demand for Money in the Gambia

2019 ◽  
Vol 9 (4) ◽  
pp. 276
Author(s):  
Kebba Bah ◽  
Karamat Khan ◽  
Artif Taufiq Nurrachman Aziez ◽  
Ali Kishwar
Keyword(s):  
Exchange Rate ◽  
The Gambia ◽  
Demand For Money ◽  
Asymmetric Effects ◽  
On Demand ◽  
Nonlinear Ardl ◽  
Long Run ◽  
Short Run ◽  
Exchange Rate Changes ◽  
The Relationship

In trying to explain the relationship between exchange rate and demand for money researchers have applied different models. In this paper, we applied both the linear and nonlinear ARDL to check the effects of exchange rate changes on the demand for money (M1 and M2) in The Gambia. The result revealed that the demand for money is cointegrated with its determinants and have a stable short-run relationship. It also revealed that exchange rate changes have only short-run asymmetric effects on demand for money (M1 or M2) but don’t have long-run effects.

scholarly journals An Investigation into the Interest Elasticity of Demand for Money in Developing Countries: A Panel Data Approach

2017 ◽  
Vol 9 (3) ◽  
pp. 69 ◽  
Author(s):  
Felix S. Nyumuah
Keyword(s):  
Developing Countries ◽  
Panel Data ◽  
Interest Rate ◽  
Equatorial Guinea ◽  
African Countries ◽  
Demand For Money ◽  
Elasticity Of Demand ◽  
Long Run ◽  
Short Run ◽  
The Interest Rate

The issue as to whether the interest rate influences the demand for money in developing countries is still controversial. The aim of this study is to attempt to resolve this controversy. The study uses panel data from eight African countries to look at the interest elasticity of demand for money in developing countries. The countries used in the study are Angola (ANG), Equatorial Guinea (EQG), Gambia (GMB), Guinea-Bissau (GBS), Kenya (KNY), Mali (MLI), Nigeria (NGR) and Uganda (UGD). Overall, the study finds the interest rate to be inelastic in the short run but elastic in the long run. This finding suggests that monetary policy is ineffective in developing countries in the long run.

Credit Crises, Precautionary Savings, and the Liquidity Trap*

2017 ◽  
Vol 132 (3) ◽  
pp. 1427-1467 ◽  
Author(s):  
Veronica Guerrieri ◽  
Guido Lorenzoni
Keyword(s):  
Interest Rates ◽  
Durable Goods ◽  
Market Model ◽  
Precautionary Savings ◽  
Consumer Spending ◽  
Heterogeneous Agent ◽  
Liquidity Trap ◽  
Short Run ◽  
The Interest Rate ◽  
Capacity Constrained

Abstract We study the effects of a credit crunch on consumer spending in a heterogeneous-agent incomplete-market model. After an unexpected permanent tightening in consumers’ borrowing capacity, constrained consumers are forced to repay their debt, and unconstrained consumers increase their precautionary savings. This depresses interest rates, especially in the short run, and generates an output drop, even with flexible prices. The output drop is larger with sticky prices, if the zero lower bound prevents the interest rate from adjusting downward. Adding durable goods to the model, households take larger debt positions and the output response can be larger.

Increasing Financial Inclusion in the Muslim World: Evidence from an Islamic Finance Marketing Experiment

2020 ◽  
Author(s):  
Dean Karlan ◽  
Adam Osman ◽  
Nour Shammout
Keyword(s):  
Interest Rates ◽  
Islamic Law ◽  
Application Rate ◽  
Interest Payment ◽  
Treatment Groups ◽  
On Demand ◽  
Product Features ◽  
Household Credit ◽  
Religious Considerations ◽  
Percent Decrease

Abstract Low utilization of household credit in developing countries may be partially due to religious considerations. In a randomized marketing experiment in Jordan, this paper estimates the effect of sharia-compliant loan features on demand for credit. To comply with Islamic law, the sharia-compliant product uses a bank fee rather than an interest payment structure, while keeping the rest of the product features very similar. Sharia-compliance increased the application rate for loans from 18 percent to 22 percent, an increase in demand that is equivalent to a 10 percent decrease in interest rates. This study also randomly varied the price of the sharia-compliant loan and finds that less religious individuals are twice as elastic with respect to price as the more religious. By comparing reasons for refusal across treatment groups, this paper estimates that survey measures that try to assess the importance of religious objections to conventional credit overestimate the importance of this type of objection by a third.

The nexus between the exchange rates and interest rates: evidence from BRIICS economies during the COVID-19 pandemic

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Bhavesh Garg ◽  
K.P. Prabheesh
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Exchange Rates ◽  
Interest Rates ◽  
Relevant Information ◽  
Content Type ◽  
Outbreak Period ◽  
Short Run ◽  
The Interest Rate ◽  
Interest Rate Differentials

Purpose This paper aims to investigate whether the interest rate differentials Granger cause expected change in the exchange rate during the COVID-19 period. The study examines if the investors in the international assets and exchange rate markets take advantages of the relevant information obtained during the COVID-19 pandemic. Design/methodology/approach This paper used daily data ranging from January 31, 2020 to June 30, 2020 and considered BRIICS economies. The study implemented the Toda–Yamamoto’s Granger causality approach to identify the causality between interest rate differentials and exchange rates. For robustness checks, the study used ARLD short-run dynamics to infer causal relations. Findings Overall, the results indicate that the interest rate differentials improve the predictability of subsequent exchange rate changes in all six BRIICS economies during the COVID-19 period wherein investors are forward-looking. The empirical results pass the robustness checks. Originality/value There is a lack of studies exploring the relationship between interest rate differentials and exchange rates in the presence of an unanticipated event such as the current pandemic. To the best of the authors’ knowledge, this is the first study to explore the causal linkages between interest rate differentials and expected change in exchange rates, focusing on the COVID-19 outbreak period.

scholarly journals Investigating the Stability of Money Demand in Ghana

2016 ◽  
Vol 64 (6) ◽  
pp. 2075-2079
Author(s):  
Dennis Nchor ◽  
Václav Adamec
Keyword(s):  
Error Correction ◽  
Money Demand ◽  
Structural Breaks ◽  
Correction Term ◽  
Demand For Money ◽  
Long Run ◽  
Short Run ◽  
The Interest Rate ◽  
The Stability ◽  
Cusum Tests

The study examined the demand for broad money and its stability in Ghana. Johansen’s cointegration approach reveals that the variables were non stationary and cointegrated, therefore, an error correction model, ECM was used to determine the factors that influence real money aggregate in Ghana from 1990 to 2014. The study estimated the results using two set of variables for real demand for money: M1 and M2+. This was done given the assumption that the demand for money was equal to the supply of money. The results show that, GDP affects the level of demand for money in the long run while the interest rate affects it in the short run. The error correction term in each of the cases shows that, 18 % of deviations in the real demand for money is corrected annually. The CUSUM tests of parameter stability showed that, the money demand function was stable over the period and the Chow test indicated that there were no structural breaks.

scholarly journals Passing on negative interest rates

2020 ◽  
Vol 56 (4) ◽  
pp. 283-290
Author(s):  
Georg Stadtmann ◽  
Karl-Heinz Moritz ◽  
Kristin Berthold ◽  
Tobias Stadtmann
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Banking Sector ◽  
Commercial Banking ◽  
Quantitative Easing ◽  
Negative Interest Rates ◽  
Banking Market ◽  
Excess Liquidity ◽  
Demand Deposits ◽  
The Interest Rate

AbstractSince the ECB has lowered the interest rate on deposits into negative territory, more and more commercial banks are also passing on this negative interest rate to their customers. The main aim of this paper is to answer the question under which conditions the commercial banking sector will be more or less reluctant to pass the negative deposit rate on to its private customers. We first clarify the circumstances under which demand deposits and excess liquidity arise, and what role quantitative easing plays in this context. Within a game-theoretical framework, it is derived that the pressure to pass on the negative interest rate is particularly high if there are no switching costs, and the banking market follows a Bertrand competition.

The Role of Different Channels in Transmitting Monetary Policy into Output and Price in Vietnam

2015 ◽  
pp. 20-40
Author(s):  
Vinh Nguyen Thi Thuy
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Interest Rate ◽  
Money Supply ◽  
Monetary Transmission ◽  
Impulse Response Functions ◽  
Short Run ◽  
The Exchange Rate ◽  
The Interest Rate ◽  
Interest Rate Channel

The paper investigates the mechanism of monetary transmission in Vietnam through different channels - namely the interest rate channel, the exchange rate channel, the asset channel and the credit channel for the period January 1995 - October 2009. This study applies VAR analysis to evaluate the monetary transmission mechanisms to output and price level. To compare the relative importance of different channels for transmitting monetary policy, the paper estimates the impulse response functions and variance decompositions of variables. The empirical results show that the changes in money supply have a significant impact on output rather than price in the short run. The impacts of money supply on price and output are stronger through the exchange rate and credit channels, but however, are weaker through the interest rate channel. The impacts of monetary policy on output and inflation may be erroneous through the equity price channel because of the lack of an established and well-functioning stock market.

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