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.

scholarly journals Transmission Mechanism of Monetary Policy: Case Study of Interest Rate Channel in India

2018 ◽  
Vol 4 (02) ◽  
Author(s):  
Prakash Anant Salvi ◽  
Davinder Kaur Suri
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Real Economy ◽  
Policy Transmission ◽  
Pass Through ◽  
The Interest Rate ◽  
Interest Rate Channel

In India, prior to 1991, the tightly controlled interest rates caused impediments in the functioning of the interest rate channel of monetary policy transmission while after 1991, the RBI undertook various measures to strengthen the market-determination of interest rates. This paper has examined the evolution of the interest channel in India across the period 1985 to 2014 firstly by studying the interest rate pass-through using the Correlation matrix and the OLS technique and secondly, by studying the transmission of policy rates to the real economy using the reduced VAR model. The results show that the transmission of interest rates pass-through from policy rates to market interest rates (both - short-term as well as long-term) has strengthened while desired impact of long term market interest rates on industrial production and inflation appears to be weak.

Economic effects of monetary policy in Russia: What do large datasets tell us?

2020 ◽  
pp. 31-53 ◽  
Author(s):  
Anna A. Pestova ◽  
Natalia A. Rostova
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Economic Activity ◽  
Global Financial Crisis ◽  
Exchange Rate Regime ◽  
Aggregate Demand ◽  
Economic Effects ◽  
Theoretical Concepts ◽  
Empirical Estimates

Is the Bank of Russia able to control inflation and, at the same time, manage aggregate demand using its interest rate instruments? In other words, are empirical estimates of the effects of monetary policy in Russia consistent with the theoretical concepts and experience of advanced economies? This paper is aimed at addressing these issues. Unlike previous research, we employ “big data” — a large dataset of macroeconomic and financial data — to estimate the effects of monetary policy in Russia. We focus exclusively on the period after the 2008—2009 global financial crisis when the Bank of Russia announced the abandoning of its fixed ruble exchange rate regime and started to gradually transit to an interest rate management. Our estimation results do not confirm standard responses of key economic activity and price variables to tightening of monetary policy. Specifically, our estimates do not reveal a statistically significant restraining effect of the Bank of Russia’s policy of high interest rates on inflation in recent years. At the same time, we find a significant deteriorating effect of the monetary tightening on economic activity indicators: according to our conservative estimates, each of the key rate increases occurred in March and December 2014 had led to a decrease in the industrial production index by about 0.2 percentage points within a year.

scholarly journals The impact of Musharakah financing on the monetary policy in the Islamic economy

2018 ◽  
Vol 3 (3/4) ◽  
pp. 139-152
Author(s):  
Hatem Adela
Keyword(s):  
Economic Theory ◽  
Monetary Policy ◽  
Interest Rate ◽  
Economic Activity ◽  
Methodological Framework ◽  
Mathematical Methods ◽  
Content Type ◽  
Return Rates ◽  
The Interest Rate ◽  
The Impact

Purpose This paper aims to contribute to formulating the methodological framework for a paradigm of Islamic economics, using the development of the conventional economics, theoretical and mathematical methods. Design/methodology/approach The study based on the inductive and mathematical methods to contribute to economic theory within the methodological framework for Islamic Economics, by using the return rate of Musharakah rather than the interest rate in influence the economic activity and monetary policy. Findings Via replacement, the concept of the interest rate by the return rates of Musharakah. It concludes that the central bank can control the monetary policy, economic activity and the efficient allocation of resources by using the return rates of Musharakah through the framework of Islamic economy. Practical/implications The study is a contribution to formulate the methodological framework for a paradigm of Islamic economics, where it investigates the impact of return rates of Musharakah on the money market and monetary policy, by the mathematical methods used in the conventional economy. Also, the study illustrates the importance of further studies that examine the methodological framework for Islamic Economics. Originality/value The study aims to contribute to formulating the Islamic economic theory, through the return rate of Musharakah financing instead of the interest rate, and its effectiveness of the monetary policy. As well as reformulating the concepts of the investment function, the present value and the marginal efficiency rate of investment according to the Islamic economy approach.

scholarly journals Safe Assets, Liquidity, and Monetary Policy

2017 ◽  
Vol 9 (2) ◽  
pp. 182-227 ◽  
Author(s):  
Pierpaolo Benigno ◽  
Salvatore Nisticò
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Risk Sharing ◽  
Balance Sheet ◽  
Multiple Assets ◽  
Interest Rate Spreads ◽  
The Interest Rate ◽  
Liquidity Shock ◽  
Deep Recession

This paper studies monetary policy in models where multiple assets have different liquidity properties: safe and “pseudo-safe” assets coexist. A shock worsening the liquidity properties of the pseudo-safe assets raises interest rate spreads and can cause a deep recession-cum-deflation. Expanding the central bank’s balance sheet fills the shortage of safe assets and counteracts the recession. Lowering the interest rate on reserves insulates market interest rates from the liquidity shock and improves risk sharing between borrowers and savers. (JEL E31, E32, E43, E44, E52)

scholarly journals “WAIT-AND-SEE” MONETARY POLICY

2017 ◽  
Vol 23 (5) ◽  
pp. 1793-1814 ◽  
Author(s):  
Xiaowen Lei ◽  
Michael C. Tseng
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Taylor Rule ◽  
Adjustment Costs ◽  
Optimal Timing ◽  
Bank Of Canada ◽  
Wait And See ◽  
The Interest Rate ◽  
Better Than

This paper develops a model of the optimal timing of interest rate changes. With fixed adjustment costs and ongoing uncertainty, changing the interest rate involves the exercise of an option. Optimal policy therefore has a “wait-and-see” component, which can be quantified using option pricing techniques. We show that increased uncertainty makes the central bank more reluctant to change its target interest rate, and argue that this helps explain recent observed deviations from the Taylor Rule. An optimal wait-and-see policy fits the target interest rates of the Fed and Bank of Canada better than the Taylor Rule.

scholarly journals Interest rates and prices causality in the Czech Republic – Granger approach

2009 ◽  
Vol 55 (No. 7) ◽  
pp. 347-356 ◽  
Author(s):  
J. Poměnková ◽  
S. Kapounek
Keyword(s):  
Monetary Policy ◽  
Czech Republic ◽  
Interest Rate ◽  
Interest Rates ◽  
Inflation Rate ◽  
Aggregate Demand ◽  
Real Economy ◽  
Investment Activity ◽  
The Czech Republic ◽  
The Interest Rate

Monetary policy analysis concerns both the assumptions of the transmission mechanism and the direction of causality between the nominal (i.e. the money) and real economy. The traditional channel of monetary policy implementation works via the interest rate changes and their impact on the investment activity and the aggregate demand. Altering the relationship between the aggregate demand and supply then impacts the general price level and hence inflation. Alternatively, the Post-Keynesians postulate money as a residual. In their approach, banks credit in response to the movements in investment activities and demand for money. In this paper, the authors use the VAR (i.e. the vector autoregressive) approach applied to the “Taylor Rule” concept to identify the mechanism and impact of the monetary policy in the small open post-transformation economy of the Czech Republic. The causality (in the Granger sense) between the interest rate and prices in the Czech Republic is then identified. The two alternative modelling approaches are tested. First, there is the standard VAR analysis with the lagged values of interest rate, inflation and economic growth as explanatory variables. This model shows one way causality (in the Granger sense) between the inflation rate and interest rate (i.e. the inflation rate is (Granger) caused by the lagged interest rate). Secondly, the lead (instead of lagged) values of the interest rate, inflation rate and real exchange rate are used. This estimate shows one way causality between the inflation rate and interest rate in the sense that interest rate is caused by the lead (i.e. the expected future) inflation rate. The assumptions based on money as a residual of the economic process were rejected in both models.

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 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 COMPARISON OF THE PASS-THROUGH SPEED MODELS OF DIFFERENT MARKETS: AN EMPIRICAL STUDY OF THE MARKETS OF MAINLAND CHINA AND TAIWAN

2020 ◽  
Author(s):  
Chi Ming Ho ◽  
Wu Yih Lin
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Mainland China ◽  
Rate Sensitivity ◽  
Interest Rate Spread ◽  
Spread Model ◽  
Pass Through ◽  
Loan Interest Rates ◽  
The Interest Rate

This paper adopted the Boone Indicator, developed by Boone et al. (2008) and Van Leuvensteijn et al. (2011; 2013), to investigate the influence of different pass-through spread models in the competition among banks in emerging markets. With the market share of banks as a dependent variable and marginal cost as an independent variable, this paper probed into the competition among banks regarding the loan market to determine whether competition on the loan interest rates of banks affected the pass-through of monetary policy-related interest rates. After analyzing approximately 5,657 entries of records of the banking industries in Taiwan and mainland China, this paper reached three significant conclusions: 1) the Boone Indicator Model pointed out that, competition in the banking market of mainland China was more intense than that of Taiwan; 2) empirical research based on the Interest Rate Spread Model indicated that the spread of mainland China was lower than that of Taiwan; 3) the Passthrough Speed Model implied that, the interest rate sensitivity of the market of mainland China was higher than that of the Taiwan market. The above results indicate that the influence of monetary policy pass-through on the interest rate of the market in mainland China is faster than in Taiwan.  

scholarly journals Analysis of Macroeconomics Stability Control of ICI Countries (Indonesia, China, India) Based on Transmission of Monetary Policy through Interest Rate Channel

2021 ◽  
Vol 8 (4) ◽  
pp. 226-234
Author(s):  
Annisa Anggreini Siswanto ◽  
Ahmad Albar Tanjung ◽  
Irsad Lubis
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Gross Domestic Product ◽  
Interest Rates ◽  
Domestic Product ◽  
Economic Stability ◽  
The Interest Rate ◽  
Transmission Of Monetary Policy ◽  
Interest Rate Channel

This study aims to analyze variable control of macroeconomic stability based on monetary policy transmission through interest rate channels in Indonesia, China, India (ICI). Variables used in the interest rate are rill interest rates, consumption, investment, gross domestic product, and inflation. This study used secondary data from 2000 to 2019. The results of the PVECM analysis through the interest rate channel show that the control of economic stability of the ICI country is carried out by investment variables and gross domestic product in the short term, while in the long run it is carried out by consumption, investment and gross domestic product. The results of the IRF analysis are the response stability of all variables is formed in the medium and long term periods. The results of the FEVD analysis show that there are variables that have the greatest contribution in the variable itself either in the short, medium, long term. The results of the interaction analysis of each variable transmission of monetary policy through interest rates can maintain and control the economic stability of the ICI country. Keywords: Interest Rate Channel, Interest Rate, Consumption, Investment, Gross Domestic Product, Inflation.

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