scholarly journals A Neowicksellian in a New Classical World: The Methodology of Michael Woodford's Interest and Prices

2006 ◽  
Vol 28 (2) ◽  
pp. 143-149 ◽  
Author(s):  
Kevin D. Hoover
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Financial Markets ◽  
Interest Rates ◽  
Theoretical Orientation ◽  
Central Banks ◽  
Point Of View ◽  
Monetary Aggregates ◽  
Classical World ◽  
Interest Rate Rule

Michael Woodford's Interest and Prices: Foundations of a Theory of Monetary Policy (2003) is an important book. Woodford's title is, of course, a conscious revival of Wicksell's own famous work and it points to an effort to recast the analysis of monetary policy as centered on interest rates. I believe that Woodford's theoretical orientation is essentially correct. In repairing to Wicksell, he places the monetary aggregates into a more reasonable perspective, correcting the distortions of the monetarist and Keynesian diversions with respect to money. My money is, so to speak, where my mouth is: My own textbook-in-progress is also based around an IS/interest-rate rule/AS model, in which financial markets cleared by price rather than the LM curve are emphasized. Such an approach, as Woodford notes, has become standard in central banks, but has not yet captured either core undergraduate or graduate textbooks and instruction. My task here, however, was not to praise Woodford's economics nor to trace or evaluate its Wicksellian routes, but to consider Interest and Prices from a methodological point of view.

scholarly journals The Unpleasant Arithmetic of the Taylor Rule

2020 ◽  
Vol 8 (3) ◽  
pp. p89
Author(s):  
Alejandro Rodriguez-Arana
Keyword(s):  
Monetary Policy ◽  
Fiscal Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Phillips Curve ◽  
Taylor Rule ◽  
Independent Component ◽  
Elasticity Of Substitution ◽  
Interest Rate Rule

This paper analyzes the effect of a monetary policy that raises the reference interest rate in order to reduce inflation in a situation where the fiscal policy parameters remain constant. In an overlapping generation’s model and in the presence of an accelerationist Phillips curve and a Taylor rule of interest rates, it is observed that increasing the independent component of said rule leads to a solution that at least in a large number of cases is unstable. In the case where the elasticity of substitution is greater than one, inflation falls temporarily, but then it can increase in an unstable manner. One way to achieve stability is to establish an interest rate rule where Taylor’s principle is not met. However, in this case many times the increase in the independent component of this rule will generate greater long-term inflation.

scholarly journals Negative Interest Rate Risk. Atavism or Normalization of Central Banks’ Monetary Policy

2019 ◽  
Vol 3 (342) ◽  
pp. 89-116
Author(s):  
Irena Pyka ◽  
Aleksandra Nocoń
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Financial Stability ◽  
Global Financial Crisis ◽  
Central Banks ◽  
Interest Rate Risk ◽  
Interest Rate Policy ◽  
Rate Policy ◽  
Negative Interest Rate Policy

In the face of the global financial crisis, central banks have used unconventional monetary policy instruments. Firstly, they implemented the interest rate policy, lowering base interest rates to a very low (almost zero) level. However, in the following years they did not undertake normalizing activities. The macroeconomic environment required further initiatives. For the first time in history, central banks have adopted Negative Interest Rate Policy (NIRP). The main aim of the study is to explore the risk accompanying the negative interest rate policy, aiming at identifying channels and consequences of its impact on the economy. The study verifies the research hypothesis stating that the risk of negative interest rates, so far unrecognized in Theory of Interest Rate, is a consequence of low effectiveness of monetary policy normalization and may adopt systemic nature, by influencing – through different channels – the financial stability and growth dynamics of the modern world economy.

Ultra-loose monetary policy will soon run its course

2016 ◽  
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Financial Markets ◽  
Interest Rates ◽  
Mutual Funds ◽  
Investor Sentiment ◽  
Central Banks ◽  
Target Range ◽  
Content Type ◽  
Equity Mutual Funds

Significance Expectations that the Fed will refrain from hiking its benchmark rates from its target range of 0.25-0.5% and that the Japanese central bank will provide further stimulus are suppressing volatility in financial markets and fuelling demand for risk assets. However, evidence that "overburdened" monetary policy is losing its efficacy triggered a sell-off in bonds and equities on September 9, increasing the scope for sharper price falls as investors worry that central banks have run out of ammunition. Impacts Services expanded in August at their slowest pace since 2010, making it less likely that the Fed will raise interest rates this month. EM bond and equity mutual funds have enjoyed a surge in inflows since the Brexit vote as yield-hungry investors pour money into risk assets Oil, a key determinant of investor sentiment, will stay below 50 dollars/barrel unless major producers agree measures to stabilise prices.

scholarly journals Conducting Monetary Policy in South Asian Economies: An Investigation

2016 ◽  
Vol 55 (3) ◽  
pp. 161-190 ◽  
Author(s):  
Muhammad Arshad Khan ◽  
Ather Maqsood Ahmed
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Sri Lanka ◽  
Interest Rates ◽  
South Asian ◽  
Central Banks ◽  
Jel Classification ◽  
Monetary Authorities ◽  
Asian Economies ◽  
Exchange Rate Movements

Monetary policy which until recently aimed at targeting monetary aggregates has quietly given way to adjusting interest rates. Most of the Central Banks now focus on money reaction function that directly targets inflation or price level. This paper examines the way monetary policy is being conducted in the four major South Asian economies, namely, Bangladesh, India, Pakistan and Sri Lanka. The analysis is based on a variant of the Taylor rule framework. Using quarterly data over the period 1990Q1 to 2012Q4, the study finds that the monetary authorities in India, Pakistan and Sri Lanka have accommodated some degree of inflationary pressure, whereas Bangladesh has continuously smoothened interest rate while setting its monetary policy. Besides pursuing a mild monetary policy stance against inflation, India, Pakistan and Sri Lanka are also giving importance to foreign interest rate and real exchange rate movements to justify their relevance in monetary policy setting. However, the same has not been found to be true for Bangladesh. JEL Classification: E52, E58, E60 Keywords: Monetary Policy Rule, Central Banks, SAARC Countries

scholarly journals Interest rate transmission mechanism of monetary policy in the selected EMU candidate countries

2009 ◽  
Vol 56 (3) ◽  
pp. 359-377 ◽  
Author(s):  
Rajmund Mirdala
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Czech Republic ◽  
Interest Rate ◽  
Interest Rates ◽  
Slovak Republic ◽  
Central Banks ◽  
Transmission Mechanism ◽  
Rate Transmission ◽  
Visegrád Countries

The stable macroeconomic environment, as one of the primary objectives of the Visegrad countries in the 1990s, was partially supported by the exchange rate policy. Fixed exchange rate systems within gradually widen bands (Czech Republic, Slovak Republic) and crawling peg system (Hungary, Poland) were replaced by the managed floating in the Czech Republic (May 1997), Poland (April 2000), Slovak Republic (October 1998) and fixed exchange rate to euro in Hungary (January 2000) with broad band (October 2001). Higher macroeconomic and banking sector stability allowed countries from the Visegrad group to implement the monetary policy strategy based on the interest rate transmission mechanism. Continuous harmonization of the monetary policy framework (with the monetary policy of the ECB) and the increasing sensitivity of the economy agents to the interest rates changes allowed the central banks from the Visegrad countries to implement monetary policy strategy based on the key interest rates determination. In the paper we analyze the impact of the central banks' monetary policy in the Visegrad countries on the selected macroeconomic variables in the period 1999-2008 implementing SVAR (structural vector autoregression) approach. We expect that higher sensitivity of domestic variables to interest rates shocks can be interpreted as a convergence of monetary policies in candidate countries towards the ECB's monetary policy.

Interest Rates and Macroeconomic Investment under Uncertainty

2021 ◽  
Vol 54 (3) ◽  
pp. 319-345
Author(s):  
Ansgar Belke ◽  
Matthias Göcke
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Central Banks ◽  
Monetary Policy Transmission ◽  
Policy Transmission ◽  
Rate Effects ◽  
Exact Shape ◽  
Micro Level ◽  
The Interest Rate

The interest rate is generally considered as an important driver of macroeconomic investment characterised by a particular form of path dependency, “hysteresis”. At the same time, the interest rate channel is a central ingredient of monetary policy transmission. In this context, we shed light on the issue (which currently is a matter of concern for many central banks) whether uncertainty over future interest rates at the zero lower bound hampers monetary policy transmission. As an innovation we derive the exact shape of the “hysteretic” impact of rate changes on macroeconomic investment under different sorts of uncertainty. Starting with hysteresis effects on the micro level, we apply an adequate aggregation procedure to derive the interest rate effects on a macro level. Our results may serve as a guideline for future central banks’ policies on how to stimulate investment in times of low or even zero interest rates and uncertainty.

Negative rates hold few positives for stock investors

2016 ◽  
Keyword(s):  
Monetary Policy ◽  
Financial Markets ◽  
Interest Rates ◽  
Business Models ◽  
Banking Sector ◽  
Equity Markets ◽  
Central Banks ◽  
Treasury Bonds ◽  
Content Type ◽  
Negative Interest Rates

Subject Financial markets turmoil and negative interest rates. Significance Global stocks are down 11.7% year-to-date in dollar terms and the yield on benchmark ten-year US Treasury bonds has hit a low of 1.66%. The turmoil in financial markets since the beginning of this year is partly attributable to investors' waning confidence in the effectiveness of central bank policy, and, in particular, that negative interest rate policies are exacerbating weaknesses in the banking sector. This is reducing the scope for a rally in equity markets, which have been overly reliant on the flow of cheap money from central banks. Impacts The strong yen will pose a severe challenge to the Japanese government's reflationary programme. While stock markets will remain sensitive to monetary policy, investors will perceive central banks as sources of volatility. The European financials sell-off stems from concerns about their earnings and business models, as opposed to a full-blown liquidity crisis.

The Determination of Interest Rates and the Effectiveness of Monetary Policy in Deregulated Financial Markets

1993 ◽  
Vol 4 (1) ◽  
pp. 120-139
Author(s):  
Penelope N. Neal
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Financial Markets ◽  
Interest Rates ◽  
Economic Activity ◽  
Empirical Studies ◽  
Correlation Coefficients ◽  
Monetary Authorities ◽  
The Interest Rate

This paper examines two issues pertinent to the effective implementation of monetary policy: firstly, the ability of the monetary authorities to control interest rates and secondly, whether interest rates have exhibited a leading, relationship with economic activity since deregulation of the financial markets. If expenditures are unresponsive to changes in interest rates it is shown that the monetary authorities have the ability to determine the interest rate but if the authorities attempt to push interest rates into regions in which expenditures become interest rate elastic, a role for liquidity preference in determination of the interest rate is restored. This limits the effects of discretionary monetary policy to the short-term. Previous empirical studies, graphs and correlation coefficients indicate only limited evidence for a negative association between interest rates and changes in economic activity whereas Granger causality tests indicate that predictable relationships between interest rates and economic activity have existed in Australia for the period in which financial markets have been deregulated.

Monetary Policy and Unnatural Low Interest Rates: Secular Stagnation or Financial Repression?

2019 ◽  
Vol 70 (2) ◽  
pp. 99-135 ◽  
Author(s):  
Ad van Riet
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Real Interest Rate ◽  
Central Banks ◽  
Potential Growth ◽  
Secular Stagnation ◽  
Financial Repression ◽  
Low Interest Rates ◽  
Equilibrium Real Interest Rate

Abstract Market interest rates have been on a declining trend over the past 35 years in all advanced economies, even reaching negative territory in some European jurisdictions. This article reviews two competing explanations for the occurrence of unnatural low interest rates. The secular stagnation hypothesis of Keynesian origin maintains that persistent non-monetary factors have caused a structural excess of desired savings over planned investments which steadily pushed down the equilibrium real interest rate that is consistent with a balanced economy. Major central banks in turn failed to sufficiently lower their monetary policy rates to revive aggregate demand, leading to anaemic economic recoveries and hysteresis effects. By contrast, the financial repression doctrine argues that central banks pursued low interest rates to ease the government budget constraint and serve political objectives. The Austrian School of Economics states that this monetary easing bias sowed the seeds of repeated boom/bust cycles and created economic distortions that dragged down potential growth and the equilibrium real interest rate. The core of the debate appears to be the long-standing controversy about the desirable role for the state in guiding the economy on a higher potential growth path as opposed to relying on the efficiency of market processes in generating prosperity.

4. The central bank and the conduct of monetary policy

2016 ◽  
pp. 54-71
Author(s):  
John Goddard ◽  
John O. S. Wilson
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Central Bank ◽  
Interest Rates ◽  
Banking Industry ◽  
Banking System ◽  
Central Banks ◽  
National Currency ◽  
The Uk ◽  
The International Monetary Fund

In most countries, the central bank manages the country’s money supply and interest rates. Most central banks hold a monopoly over printing the national currency and have supervisory or regulatory responsibilities for overseeing the banking industry. The central bank typically performs a dual role, operating as the government’s banker, and as banker to the rest of the banking system. ‘The central bank and the conduct of monetary policy’ explains the central bank’s role and describes the central banks of the UK, EU, and US, as well as the International Monetary Fund. It also outlines the central bank’s responsibility for implementing monetary policy and explains the deposit expansion multiplier, interest rate targeting, and quantitative easing.

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