Mortgage and Short-term Interest Rate Spread: The Case of New Zealand

ABSTRACT We examine economic consequences of U.S. bank regulators' phased removal of the prudential filter for accumulated other comprehensive income for advanced approaches banks beginning on January 1, 2014. The primary effect of the AOCI filter is to exclude unrealized gains and losses on available-for-sale securities from banks' regulatory capital. We predict and find that, to mitigate regulatory capital volatility resulting from the filter removal, advanced approaches banks increased the proportion of investment securities classified as held-to-maturity, thereby limiting their financing and interest rate risk management options, and they decreased securities risk, thereby reducing their interest rate spread. We further predict and find that these banks borrow more under securities repurchase agreements potentially collateralized by held-to-maturity securities and reduce loan supply owing to their reduced financing options, and that they increase loan risk to mitigate the decrease in their interest rate spread. JEL Classifications: G21; G28; M41; M48. Data Availability: Data are available from the public sources cited in the text.

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A Note Concerning the Dynamics of Government Bond Yields

The American Economist ◽

10.1177/0569434520988275 ◽

2021 ◽

pp. 056943452098827

Author(s):

Tanweer Akram

Keyword(s):

Interest Rate ◽

Financial Markets ◽

Yield Curve ◽

Empirical Studies ◽

State Theory ◽

Government Bond ◽

Bond Yields ◽

Short Term ◽

Government Bonds

Keynes argued that the central bank can influence the long-term interest rate on government bonds and the shape of the yield curve mainly through the short-term interest rate. Several recent empirical studies that examine the dynamics of government bond yields not only substantiate Keynes’s view that the long-term interest rate responds markedly to the short-term interest rate but also have relevance for macroeconomic theory and policy. This article relates Keynes’s discussions of money, the state theory of money, financial markets, investors’ expectations, uncertainty, and liquidity preference to the dynamics of government bond yields for countries with monetary sovereignty. Investors’ psychology, herding behavior in financial markets, and uncertainty about the future reinforce the effects of the short-term interest rate and the central bank’s monetary policy actions on the long-term interest rate. JEL classifications: E12; E40; E43; E50; E58; E60; F30; G10; G12; H62; H63

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The effect of federal deficits and debt on the tax-adjusted, short-term, real interest rate

Economics Letters ◽

10.1016/0165-1765(90)90239-w ◽

1990 ◽

Vol 34 (2) ◽

pp. 169-173 ◽

Cited By ~ 9

Author(s):

Stuart D. Allen

Keyword(s):

Interest Rate ◽

Real Interest Rate ◽

Short Term

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The Case for Open-Market Purchases in a Liquidity Trap

The American Economic Review ◽

10.1257/0002828053828473 ◽

2005 ◽

Vol 95 (1) ◽

pp. 110-137 ◽

Cited By ~ 81

Author(s):

Alan J Auerbach ◽

Maurice Obstfeld

Keyword(s):

Interest Rate ◽

Large Scale ◽

Open Market ◽

Macroeconomic Stabilization ◽

Short Term ◽

Liquidity Trap ◽

Welfare Impact ◽

Dynamic General Equilibrium Model ◽

Policy Tool ◽

Economic Experience

Prevalent thinking about liquidity traps suggests that the perfect substitutability of money and bonds at a zero short-term nominal interest rate renders open-market operations ineffective for achieving macroeconomic stabilization goals. We show that even were this the case, there remains a powerful argument for large-scale open market operations as a fiscal policy tool. As we also demonstrate, however, this same reasoning implies that open-market operations will be beneficial for stabilization as well, even when the economy is expected to remain mired in a liquidity trap for some time. Thus, the microeconomic fiscal benefits of open-market operations in a liquidity trap go hand in hand with standard macroeconomic objectives. Motivated by Japan’s recent economic experience, we use a dynamic general-equilibrium model to assess the welfare impact of open-market operations for an economy in Japan’s predicament. We argue Japan can achieve a substantial welfare improvement through large open-market purchases of domestic government debt.

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A statistical comparison of the short-term interest rate models for Japan, U.S., and Germany

Financial Engineering and the Japanese Markets ◽

10.1007/bf02425805 ◽

1996 ◽

Vol 3 (3) ◽

pp. 263-275 ◽

Cited By ~ 9

Author(s):

Isao Shoji ◽

Tohru Ozaki

Keyword(s):

Interest Rate ◽

Short Term ◽

Interest Rate Models ◽

Statistical Comparison

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CANDIDE et la monnaie

L Actualité économique ◽

10.7202/800659ar ◽

2009 ◽

Vol 52 (1) ◽

pp. 75-103

Author(s):

Jean-Pierre Aubry ◽

Pierre Duguay

Keyword(s):

Interest Rate ◽

Interest Rates ◽

Term Structure ◽

Structural Equations ◽

Reduced Form ◽

Real Sector ◽

Short Term ◽

The Real ◽

Structure Equations

Abstract In this paper we deal with the financial sector of CANDIDE 1.1. We are concerned with the determination of the short-term interest rate, the term structure equations, and the channels through which monetary policy influences the real sector. The short-term rate is determined by a straightforward application of Keynesian liquidity preference theory. A serious problem arises from the directly estimated reduced form equation, which implies that the demand for high powered money, but not the demand for actual deposits, is a stable function of income and interest rates. The structural equations imply the opposite. In the term structure equations, allowance is made for the smaller variance of the long-term rates, but insufficient explanation is given for their sharper upward trend. This leads to an overstatement of the significance of the U.S. long-term rate that must perform the explanatory role. Moreover a strong structural hierarchy, by which the long Canada rate wags the industrial rate, is imposed without prior testing. In CANDIDE two channels of monetary influence are recognized: the costs of capital and the availability of credit. They affect the business fixed investment and housing sectors. The potential of the personal consumption sector is not recognized, the wealth and real balance effects are bypassed, the credit availability proxy is incorrect, the interest rate used in the real sector is nominal rather than real, and the specification of the housing sector is dubious.

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Determinants of Treasury-LIBOR Swap Spreads

Review of Pacific Basin Financial Markets and Policies ◽

10.1142/s0219091505000567 ◽

2005 ◽

Vol 08 (04) ◽

pp. 687-705 ◽

Cited By ~ 3

Author(s):

D. K. Malhotra ◽

Vivek Bhargava ◽

Mukesh Chaudhry

Keyword(s):

Interest Rate ◽

Interest Rates ◽

Default Risk ◽

Yield Curve ◽

Short Term ◽

Long Run ◽

Interest Rate Volatility ◽

Short Run ◽

Using Data ◽

Swap Spreads

Using data from the Treasury versus London Interbank Offer Swap Rates (LIBOR) for October 1987 to June 1998, this paper examines the determinants of swap spreads in the Treasury-LIBOR interest rate swap market. This study hypothesizes Treasury-LIBOR swap spreads as a function of the Treasury rate of comparable maturity, the slope of the yield curve, the volatility of short-term interest rates, a proxy for default risk, and liquidity in the swap market. The study finds that, in the long-run, swap spreads are negatively related to the yield curve slope and liquidity in the swap market. We also find that swap spreads are positively related to the short-term interest rate volatility. In the short-run, swap market's response to higher default risk seems to be higher spread between the bid and offer rates.

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