scholarly journals Effectiveness of high interest rate policy on exchange rates: A reexamination of the Asian financial crisis

2006 ◽  
Vol 2006 ◽  
pp. 1-9 ◽  
Author(s):  
Tim Brailsford ◽  
Jack H. W. Penm ◽  
Chin Diew Lai
Keyword(s):  
Interest Rate ◽  
Financial Crisis ◽  
Exchange Rates ◽  
Interest Rates ◽  
Asian Financial Crisis ◽  
The Philippines ◽  
High Interest Rate ◽  
Interest Rate Policy ◽  
High Interest ◽  
Rate Policy

One of the most controversial issues in the aftermath of the Asian financial crisis has been the appropriate response of monetary policy to a sharp decline in the value of some currencies. In this paper, we empirically examine the effects on Asian exchange rates of sharply higher interest rates during the Asian financial crisis. Taking account of the currency contagion effect, our results indicate that sharply higher interest rates helped to support the exchange rates of South Korea, the Philippines, and Thailand. For Malaysia, no significant causal relation is found from the rate of interest to exchange rates, as the authorities in Malaysia did not actively adopt a high interest rate policy to defend the currency.

What Would Have Happened in Indonesia if Different Economic Policies Had Been Implemented When the Crisis Started?

2002 ◽  
Vol 1 (2) ◽  
pp. 75-103 ◽  
Author(s):  
Iwan J. Azis
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Income Distribution ◽  
High Interest Rate ◽  
Interest Rate Policy ◽  
Net Worth ◽  
High Interest ◽  
Lower Interest Rate ◽  
Rate Policy ◽  
Business Confidence

Many models of the Indonesian economy cannot generate the large collapses in output and exchange rate experienced in 1997–98. The model in this paper was able to replicate the actual events by adding several new links. One new link is between the depreciation of the exchange rate and the deterioration of the balance sheets of firms, which are in turn linked to decline in investment. Another new link is between decline in output and decline in business confidence, leading to possible increased capital outflow and exchange rate collapse. The IMF's high interest rate policy did not succeed in strengthening the rupiah because it inflicted such severe damage on the net worth of Indonesian firms that it caused capital flight to accelerate, turning what was originally just a financial crisis into a major recession. Two alternative counterfactual policy packages are examined: (1) a lower interest rate policy and (2) a lower interest rate policy combined with a partial write-down of the external debt. The model indicates that the country's macroeconomic conditions would have fared better if the prolonged high interest rate policy had been avoided. The results suggest that early actions should have been undertaken to address the mounting private foreign debts. The delayed handling of private debts had prevented other policies from working effectively. The two counterfactual policies also would have resulted in a more favorable outcome for income distribution and poverty incidence. The model revealed a close correlation between worsening (improving) income distribution and increasing (declining) interest rates.

Consequences of a High Interest Rate Policy in the Process of Disinflation. The Case of Poland

1998 ◽  
Vol 9 (1) ◽  
pp. 15-31 ◽  
Author(s):  
Alojzy Z. Nowak ◽  
Kazimierz Ryć ◽  
Jerzy Żyżński
Keyword(s):  
Interest Rate ◽  
Banking Sector ◽  
Banking System ◽  
Research Programme ◽  
Open Market ◽  
High Interest Rate ◽  
Interest Rate Policy ◽  
The Real ◽  
High Interest ◽  
Rate Policy

The aim of the article is to analyse the consequences of a high interest rate policy pursued in Poland since 1990 in the process of disinflation. The interest rate was the main instrument of monetary policy in a situation when the economy lacked a money market on which the money supply could be influenced directly by open market operations. The application of a high interest rate had many unfavourable consequences both in the real sphere and in the financial sphere. The most important of these consequences in the real sphere was that it forced self-financing on the part of enterprises, the ineffective allocation of resources, delays in carrying out investments, the cyclicity of demand; the effects in the financial sphere mainly concern the banking sector, where the assets of the banking system become distorted, while for enterprises the most important consequences result from the high cost of credit, which increases costs and reduced the competitiveness of enterprises dependent on credit. The authors analyse these consequences and formulate hypotheses and a research programme for testing them.

Some Reflections on the Relation Between Finance and Distribution in the 1980s

1992 ◽  
Author(s):  
J. A. Kregel
Keyword(s):  
Interest Rate ◽  
Technological Change ◽  
Financial Structure ◽  
High Interest Rate ◽  
Interest Rate Policy ◽  
High Interest ◽  
Savings And Loan ◽  
Rate Policy ◽  
Functional Distribution

Growth and technological change have created difficulties in linking changes in individual and functional distribution. The problem is complicated by changes in financial structure in the 1980s; making it more difficult to trace the effect on distribution of such events is the increase in government indebtedness, high interest rate policy, or the collapse of savings and loan banks. This paper tries to outline these difficulties and is a first step in assessing how these factors affect individual distribution.

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.

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.

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.

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