The Link between German Short- and Long-Term Interest Rates. Some Evidence against a Term Structure Oriented Monetary Policy / Der Zusammenhang zwischen kurz- und langfristigen Zinssätzen in Deutschland. Empirische Evidenz gegen eine zinsstrukturorientierte Geldpolitik

1998 ◽  
Vol 217 (2) ◽  
Author(s):  
Uwe Hassler ◽  
Dieter Nautz
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Interest Rates ◽  
Term Structure ◽  
Monetary Union ◽  
Stable Relationship ◽  
Monetary Targeting ◽  
Main Indicator ◽  
Short And Long Term

SummaryCritics of the Bundesbank's monetary policy recently suggested the abandonment of monetary targeting in favour of the term structure of interest rates as the main indicator of central bank policy. However, a term structure oriented policy requires a reliable link between short- and long-term interest rates. Our analysis clearly suggests that there is no stable relationship between German short- and long-term interest rates, in particular not after the German monetary union. Consequently, the empirical results of this paper indicate that this policy has not much chance of success.

Validity of the Expectations Hypothesis of the Term Structure of Interest Rates: The Case of Saudi Arabia

2020 ◽  
Vol 16 (1) ◽  
Author(s):  
Nizar Harrathi ◽  
Hamed M. Alhoshan
Keyword(s):  
Monetary Policy ◽  
Saudi Arabia ◽  
Interest Rates ◽  
Term Structure ◽  
Single Equation ◽  
Policy Implications ◽  
Equation Approach ◽  
Expectation Hypothesis ◽  
Short And Long Term

AbstractWe examine and test the validity of the expectation hypothesis of the term structure (EHTS) of interest rates in Saudi Arabia using the traditional single equation approach, Campbell and Shiller methodology, Error Correction Model, and monthly data over the period June 1983 to December 2014. The results of the single equation approach indicate that the test of validity of the expectation hypothesis cannot be rejected for all maturities. We also find that the validity of the EHTS of interest rates is supported through the stationarity of the term spreads between short- and long-term interest rates. Moreover, the cointegration test reveals the existence of a cointegration relationship between short- and long-term interest with $\left(1-1\right)$ cointegrating vector, suggesting the validity EHTS of interest rates. Policy implications based on the empirical results suggest that the transparency of monetary policy in Saudi Arabia and the effective role of the Saudi Arabian Monetary Authority (SAMA) in conducting monetary policy increase the predictive power of market participants of future movements of short-term interest rates.

Central Bank Liquidity Management and the Signal Extraction Problem on the Money Market / Die Liquiditätssteuerung der Notenbank und das Signal-extraktionsproblem am Geldmarkt

2000 ◽  
Vol 220 (3) ◽  
pp. 284-301
Author(s):  
Ulrich Bindseil
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Interest Rates ◽  
Term Structure ◽  
Management Strategies ◽  
Money Market ◽  
Signal Extraction ◽  
Maintenance Period ◽  
Liquidity Management ◽  
Expectation Theory

Summary Understanding the factors determining overnight rates is crucial both for central bankers and private market participants, since, assuming the validity of the expectation theory of the term structure of interest rates, expectations with regard to this “monadic” maturity should determine longer term rates, which are deemed to be relevant for the transmission of monetary policy. The note proposes a simple model of the money market within a two-day long reserve maintenance period to derive relationships between the relevant quantities, expectations concerning these quantities for the rest of the reserve maintenance period, and overnight rates. It is argued that a signal extraction problem faced by banks when observing quantities such as their aggregate reserve holdings and allotment amounts of monetary policy operations is at the core of these relationships. The usefulness of the model is illustrated by applying it to the analysis of three alternative liquidity management strategies of a central bank.

scholarly journals The term structure of interest rates and inflation forecast targeting

2011 ◽  
Vol 12 (2) ◽  
pp. 162-179
Author(s):  
Eric Schaling ◽  
Willem Verhagen ◽  
Sylvester Eiffinger
Keyword(s):  
Interest Rate ◽  
Central Bank ◽  
Interest Rates ◽  
Term Structure ◽  
Inflation Targeting ◽  
Nominal Interest Rate ◽  
Term Spread ◽  
State Of The Economy ◽  
Output Persistence

This paper examines the implications of the expectations theory of the term structure of interest rates for the implementation of inflation targeting. We show that the responsiveness of the central bank’s instrument to the underlying state of the economy is increasing in the duration of the long-term bond.  On the other hand, an increase in duration will make long-term inflationary expectations - and therefore also the long-term nominal interest rate - less responsive to the state of the economy. The extent to which the central bank is concerned with output stabilisation will exert a moderating influence on the central bank’s response to leading indicators of future inflation. However, the effect of an increase in this parameter on the long-term nominal interest rate turns out to be ambiguous. Next, we show that both the sensitivity of the nominal term spread to economic fundamentals and the extent to which the spread predicts future output, are increasing in the duration of the long bond and the degree of structural output persistence. However, if the central bank becomes relatively less concerned about inflation stabilisation the term spread will be less successful in predicting real economic activity.

Optimal Term Structure in a Monetary Economy with Incomplete Markets

2017 ◽  
Vol 18 (1) ◽  
Author(s):  
Matthew Hoelle
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Necessary Conditions ◽  
Policy Rules ◽  
Real Effects ◽  
Monetary Economy ◽  
Short And Long Term ◽  
Dynamic Policy ◽  
Recursive Representation

AbstractIn a stochastic economy, the rebalancing of short and long term government debt positions can have real effects when markets are incomplete. This paper analyzes both stationary and dynamic policy rules for the term structure of interest rates. After proving the existence of a recursive representation of equilibrium, necessary conditions for Pareto efficiency are characterized. The necessary conditions are equivalent for both stationary and dynamic policy rules.

Central Bank Planning

2018 ◽  
Author(s):  
Benjamin Braun
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Interest Rates ◽  
Practical Reasoning ◽  
Structural Break ◽  
Central Banks ◽  
State Agency ◽  
Policy Interventions ◽  
Forward Guidance

Central banks have increasingly used communication to guide market actors’ expectations of future rates of interest, inflation, and growth. However, aware of the pitfalls of (financial) central planning, central bankers until recently drew a line by restricting their monetary policy interventions to short-term interest rates. Longer-term rates, they argued, reflected decentralized knowledge and should be determined by market forces. By embracing forward guidance and quantitative easing (QE) to target long-term rates, central banks have crossed that line. While consistent with the post-1980s expansion of the temporal reach of monetary policy further into the future, these unconventional policies nevertheless mark a structural break—the return of hydraulic macroeconomic state agency, refashioned for a financialized economy. This chapter analyses the theoretical and practical reasoning behind this shift in the governability paradigm and examines the epistemic and reputational costs of modern central bank planning and the non-market setting of long-term bond prices.

Foreign official holdings of US treasuries, stock effect and the economy: a DSGE approach

2018 ◽  
Vol 20 (1) ◽  
Author(s):  
John Nana Francois
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Term Structure ◽  
Demand Curve ◽  
Feedback Mechanism ◽  
Empirical Literature ◽  
Term Spread ◽  
Short And Long Term ◽  
Stock Effect

Abstract This paper examines the effects of shocks to foreign official holdings of long-term U.S. Treasuries (FOHL) on macroeconomic aggregates using a dynamic general equilibrium model. The model treats short- and long-term bonds as imperfect substitutes through endogenous portfolio adjustment frictions. This provides a channel for changes in relative supply of assests to influence asset prices. Three key findings emerge: (1) positive shocks to FOHL impact the long-term interest rate and the term spread negatively through a stock effect channel – defined as persistent changes in interest rates as a result of movement along the Treasury demand curve. This result is consistent with findings in the empirical literature. (2) Through a feedback mechanism from an endogenous term structure in the model, the decline in the long-term interest rate induces an expansion in economic activity which leads to an increase in consumption, output and inflation. Both the stock effect and the feedback mechanism are generated by the portfolio frictions. (3) Higher degrees of persistence of FOHL shocks or imperfect asset substitution generate a prolonged negative stock effect following shocks to FOHL. This causes a longer delay of the term spread to return to its steady state after it falls; hence, inducing an extended and stronger stimulative feedback effect from the endogenous term structure into the modeled economy.  These findings help explain macroeconomic events such as the so-called ``Greenspan conundrum'' of the mid 2000s.

scholarly journals Some Lessons from the Yield Curve

1995 ◽  
Vol 9 (3) ◽  
pp. 129-152 ◽  
Author(s):  
John Y Campbell
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Yield Curve ◽  
Bond Market ◽  
Expectations Hypothesis ◽  
Expectation Hypothesis ◽  
Maturity Structure ◽  
Short And Long Term ◽  
The U.S

This paper reviews the literature on the relation between short- and long-term interest rates. It summarizes the mixed evidence on the expectation hypothesis of the term structure: when long rates are high relative to short rates, short rates tend to rise as implied by the expectations hypothesis, but long rates tend to fall, which is contrary to the expectations hypothesis. The paper discusses the response of the U.S. bond market to shifts in monetary policy in the spring of 1994 and reviews the debate over the optimal maturity structure of the U.S. government debt.

scholarly journals Powrót do przedkryzysowej polityki pieniężnej a stabilność systemu finansowego

2017 ◽  
pp. 190-200
Author(s):  
Ilona Skibińska-Fabrowska
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Interest Rates ◽  
Balance Sheet ◽  
Policy Instruments ◽  
Central Banks ◽  
Financial Assets ◽  
Negative Effects ◽  
The Stability

Faced with the financial crisis in 2008, the central banks used conventional monetary policy instruments. However, the problem of zero lower bond forced them to use unconventional monetary policy instruments - quantitative easing carried out as part of the so-called central bank balance sheet politics and relying on the buying by the central bank of di&erent kinds of financial assets - resulting in stabilization of the situation on financial markets in conditions of low long-term interest rates. Balance sheet totals of the central banks rose repeatedly. Their structure also changed. At present possible effects for the stability of the financial system of the return to the pre-crisis monetary policy are the topic of debate. The exit strategy is giving rise to a significant risks and the coordination of economic policy and the transparency of action taken by monetary authorities can only minimize possible negative effects

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