Implications of Central banks’ negative policy rates on financial stability

2018 ◽  
Vol 10 (2) ◽  
pp. 310-320
Author(s):  
Benjamin S. Kay
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Financial Stability ◽  
Global Economy ◽  
Content Type ◽  
Interest Rate Policy ◽  
Trade Offs ◽  
Negative Interest Rates ◽  
Rate Policy ◽  
Negative Interest Rate Policy

Purpose While central bankers have widely discussed the trade-offs of negative interest rates on monetary policy, the consequences of negative rates on financial stability are less well understood. The purpose of this paper is to examine the likely and possible financial stability consequences of a negative rates policy with particular focus on banks, short-term funding markets, foreign exchange markets, asset managers, pension funds and insurers. Design/methodology/approach It draws from international experience with negative interest rates to identify financial stability threats posed to any economy by negative interest rates, and it also highlights where the US experience is likely to differ. Findings In time, financial market threats and other logistical issues of a negative interest rate policy can be managed or overcome. Even cumulatively, these threats are likely to be small as long as the rates remain only modestly negative. However, if the rates remain negative for long periods or they become more sharply negative, the rewards of avoiding negative rates increase. Originality/value Does the negative interest rate policy directly or through these challenges of implementation present a substantial obstacle to achieving financial stability objectives? As policy rates go negative in a greater share of the global economy, the financial stability consequences remain poorly understood and under discussed.

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.

Negative Interest Rate Policy as Conventional Monetary Policy

2015 ◽  
Vol 234 ◽  
pp. R5-R14 ◽  
Author(s):  
Miles S. Kimball
Keyword(s):  
Economic Theory ◽  
Interest Rate ◽  
Interest Rates ◽  
Real Interest Rate ◽  
Rate Of Return ◽  
Interest Rate Policy ◽  
Paper Currency ◽  
Rate Policy ◽  
Standard Models ◽  
Negative Interest Rate Policy

As long as all interest rates move in tandem – including the rate of return on paper currency – economic theory suggests no important difference between interest rate changes in the positive region and interest rate changes in the negative region. Indeed, in standard models, only the real interest rate and spreads between real interest rates matter. Thus, in most respects, negative interest rate policy is conventional. It is only (a) what needs to be done with paper currency, (b) difficulties in understanding negative rates or (c) institutional features interacting with negative rates that make negative interest rate policy unconventional.

scholarly journals Modern Interest Rate Policy and the Phenomenon of Negative Interest Rates

2017 ◽  
Vol 22 (4) ◽  
pp. 392-399
Author(s):  
V.K. Burlachkov ◽  
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Interest Rate Policy ◽  
Negative Interest Rates ◽  
Rate Policy

Effect of Low and Negative Interest Rates: Evidence from Indian and Sri Lankan Economies

2018 ◽  
Vol 6 (2) ◽  
pp. 90-99
Author(s):  
Moid U. Ahmad ◽  
Hetti Arachchige Gamini Premaratne
Keyword(s):  
Interest Rate ◽  
Central Bank ◽  
Interest Rates ◽  
High Rate ◽  
Sri Lankan ◽  
Global Business ◽  
Interest Rate Policy ◽  
Negative Interest Rates ◽  
The Us ◽  
Rate Policy

Interest rates are critical to any economy. Usually the central bank of a country supervises and tries to control the interest rates but there is always an element of uncontrollable effects: local or international. A central bank adopts a monetary strategy to affect various macroeconomic parameters such as inflation, exchange rate (ER), economic growth and many others. A country may decide to adopt Ultra-low Interest Rate Policy (ULIRP) or Negative Interest Rate Policy (NIRP) or a policy with moderate/high rate of interest. In today’s global business scenario, economies are connected and influence one another. The US and UK economies have seen a very low and negative interest rates historically, at least in recent past. Indian and Sri Lankan economies are integrated with the US and UK economies and thus are affected by their prevailing interest rates. The effect of low and zero interest rate policy of a country (USA and UK) on interest rates and economy of co-integrated economies (India and Sri Lanka) have been studied in this research. The objective of this study is to understand the implications of ULIRPs and NIRPs in the context of Indian and Sri Lankan economies. Two significant conclusions of the research are that Indian and Sri Lankan economies are affected by the US and UK policies and that they are affected at a lag of eight years.

scholarly journals Central bank interest policy: conceptual concepts and socio-economic context

2021 ◽  
Vol 7 (Extra-E) ◽  
pp. 531-536
Author(s):  
Aleksandr N. Sukharev ◽  
Sergey N. Smirnov
Keyword(s):  
Interest Rate ◽  
Central Bank ◽  
Interest Rates ◽  
Interest Rate Policy ◽  
Economic Context ◽  
Negative Interest Rates ◽  
Interest Policy ◽  
Rate Policy ◽  
The Interest Rate

The article reveals the goals and mechanisms of the interest rate policy of the central bank. The role of the discount rate in ensuring financial and macroeconomic stability is shown. The Taylor rule is presented and justified in a modified form, by including the money supply parameter in it. The phenomenon of negative interest rates is revealed.

scholarly journals Modern Interest Rate Policy and the Phenomenon of Negative Interest Rates

2017 ◽  
Vol 22 (4) ◽  
pp. 392-399
Author(s):  
V.K. Burlachkov ◽  
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Interest Rate Policy ◽  
Negative Interest Rates ◽  
Rate Policy

scholarly journals THE NATURAL INTEREST RATE FALLACY: WHY NEGATIVE INTEREST RATE POLICY MAY WORSEN KEYNESIAN UNEMPLOYMENT?

2018 ◽  
Vol 77 (304) ◽  
pp. 7 ◽  
Author(s):  
Thomas I. Palley
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Full Employment ◽  
Aggregate Demand ◽  
Natural Rate ◽  
Policy Assessment ◽  
Price Inflation ◽  
Interest Rate Policy ◽  
Rate Policy ◽  
Negative Interest Rate Policy

<p><strong>ABSTRACT</strong></p><p><strong></strong>Negative interest rate policy (NIRP) has quickly become a consensus policy within the economics establishment. This paper argues that consensus is dangerously wrong, resting on flawed theory and flawed policy assessment. Regarding theory, NIRP draws on fallacious pre-Keynesian classical economic logic that asserts there is a natural rate of interest which can ensure full employment. That pre-Keynesian logic has been augmented by zero lower bound economics which claims the natural rate may be negative in times of severe demand shortage, so that policy must deliver it since the market cannot. In contrast, Keynes argued investment could become saturated so lower interest rates cannot increase aggregate demand (AD) and no natural interest rate exists. Regarding policy assessment, NIRP turns a blind eye to the possibility that negative interest rates may reduce AD, cause financial fragility, create a macroeconomics of whiplash owing to contradictions between policy today and tomorrow, promote currency wars that undermine the international economy, and foster a political economy that spawn’s toxic politics. Worst of all, NIRP maintains and encourages the flawed model of growth, based on debt and asset price inflation, which has already done such harm.</p><p><strong><br /></strong></p><p><strong>LA FALACIA DE LA TASA DE INTERÉS NATURAL: ¿POR QUÉ LA POLÍTICA DE TASAS DE INTERÉS NEGATIVAS PUEDE EMPEORAR EL DESEMPLEO KEYNESIANO?</strong></p><p> </p><p><strong>RESUMEN</strong></p><p><strong></strong>En la economía convencional ha cristalizado de forma rápida un consenso en torno de la política de tasas de interés negativas (PTIN). En este artículo argumento que este consenso es erróneo y peligroso, dado que descansa en una teoría equivocada y en una evaluación de política defectuosa. Respecto de la teoría, la PTIN se basa en una lógica clásica pre-keynesiana falsa que sostiene que existe una tasa de interés natural que puede garantizar el pleno empleo. Esa lógica pre-keynesiana se ha extendido con la economía de límite inferior cero que afirma que la tasa natural puede ser negativa en momentos de escasez severa de demanda, de suerte que la política económica debe proveerla dado que el mercado es incapaz de hacerlo. En contraste, Keynes argumenta que la inversión puede saturarse, de manera que las tasas de interés bajas no pueden incrementar la demanda agregada (DA), y que la tasa de interés natural no existe. En cuanto a la evaluación de política, la PTIN soslaya la posibilidad de que las tasas de interés negativas pueden reducir la DA, causar fragilidad financiera, generar una macroeconomía de latigazos debido a las contradicciones entre la política de hoy y la de mañana, promover guerras monetarias que socaven a la economía internacional y fortalecer una economía política que engendra políticas tóxicas. Lo peor de todo es que la PTIN sostiene y alienta el modelo de crecimiento erróneo que se basa en deuda y en la inflación del precio de los activos, que ya ha causado un gran daño.</p>

Euro-area bonds may offer NYTM for decades, or forever

2019 ◽  
Keyword(s):  
Interest Rates ◽  
Euro Area ◽  
Board Member ◽  
Executive Board ◽  
Content Type ◽  
Interest Rate Policy ◽  
Rate Policy ◽  
Step Down ◽  
Rolling Scheme ◽  
Negative Interest Rate Policy

Subject NYTM -- Japan and the euro-area. Significance ECB Executive Board member Sabine Lautenschlager announced on September 26 that she would step down before her term expires. She opposes further monetary loosening, as do the heads of the Bundesbank and the Dutch central bank. When Christine Lagarde becomes ECB president next month, four of the top six ECB officials will have changed in the last seven months, exacerbating concerns about negative interest rate policy (NIRP) and bonds with negative yields to maturity (NYTM). Impacts 'Hedging’ a ten-year Bund by selling euros for dollars on a rolling scheme not matching the bond’s maturity will not always create YTM. Institutional investors in Japan and the euro-area will hold cash rather than near-zero coupon bonds as interest rates will not rise fast. Rate and YTM differentials between the euro-area and US markets could widen further as the new ECB bond-buying programme gets under way.

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