The Excess Sensitivity of Long-term Interest rates and Central Bank Credibility

2020 ◽  
Author(s):  
Kwangyong Park
Keyword(s):  
Central Bank ◽  
Interest Rates ◽  
Central Bank Credibility ◽  
Excess Sensitivity

scholarly journals Journal of the History of Economic Thought Preprints - Limits to Arbitrage and Interest Rates: A Debate Between Keynes, Hawtrey and Hicks

2018 ◽  
Author(s):  
Lucy BRILLANT
Keyword(s):  
Business Cycle ◽  
Central Bank ◽  
Interest Rates ◽  
Economic Thought ◽  
History Of Economic Thought ◽  
Short Term ◽  
Limits To Arbitrage ◽  
History Of ◽  
The Business Cycle

This paper deals with a debate between Hawtrey, Hicks and Keynes concerning the capacity of the central bank to influence the short-term and the long-term rates of interest. Both Hawtrey and Keynes considered the central bank’s ability to influence short-term rates of interest. However, they do not put the same emphasis on the study of the long-term rates of interest. According to Keynes, long-term rates are influenced by future expected short-term rates (1930, 1936), whereas for Hawtrey (1932, 1937, 1938), long-term rates are more dependent on the business cycle. Short-term rates do not have much effect on long-term rates according to Hawtrey. In 1939, Hicks enters the controversy, giving credit to both Hawtrey’s and Keynes’s theories, and also introducing limits to the operations of arbitrage. He thus presented a nuanced view.

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.

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.

LIMITS TO ARBITRAGE AND INTEREST RATES: A DEBATE AMONG KEYNES, HAWTREY, AND HICKS

2018 ◽  
Vol 40 (3) ◽  
pp. 335-351 ◽  
Author(s):  
Lucy Brillant
Keyword(s):  
Business Cycle ◽  
Central Bank ◽  
Interest Rates ◽  
Short Term ◽  
John Maynard Keynes ◽  
Limits To Arbitrage ◽  
The Business Cycle

This paper deals with a debate among Ralph George Hawtrey, John Richard Hicks, and John Maynard Keynes concerning the capacity of the central bank to influence the short-term and the long-term rates of interest. Both Hawtrey and Keynes considered the central bank’s ability to influence short-term rates of interest. However, they do not put the same emphasis on the study of the long-term rates of interest. According to Keynes, long-term rates are influenced by future expected short-term rates (1930, 1936), whereas for Hawtrey ([1932] 1962, 1937, 1938), long-term rates are more dependent on the business cycle. Short-term rates do not have much effect on long-term rates, according to Hawtrey. In 1939, Hicks enters the controversy, giving credit to both Hawtrey’s and Keynes’s theories, and also introducing limits to the operations of arbitrage. He thus presented a nuanced view.

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.

Open Market Operations

2019 ◽  
pp. 435-454
Author(s):  
Jan Toporowski
Keyword(s):  
Central Bank ◽  
Interest Rates ◽  
Central Banks ◽  
Transmission Mechanism ◽  
Policy Framework ◽  
Monetary Transmission ◽  
Quantitative Easing ◽  
Open Market ◽  
Financial Systems

Open market operations are the buying and selling of securities by the central bank. Such operations differ from discount operations in that open market operations are undertaken at the initiative of the central bank rather than a commercial bank. Historically, such trading of securities has predated the setting of interest rates. The emergence of long-term finance and complex financial systems has extended the range of securities in which central banks may deal. Open market operations depend on the policy framework set by the central bank. But such operations are not necessary for the setting of interest rates. Such operations are often undertaken when the monetary transmission mechanism from interest rates appears to have failed, as in the case of recent quantitative easing operations. In general, open market operations have proved effective in times of banking or financial crisis.

Russian policy toolkit mixes rate rises and price caps

2021 ◽  
Keyword(s):  
Central Bank ◽  
Interest Rates ◽  
Oil Prices ◽  
Target Level ◽  
Content Type ◽  
Price Controls ◽  
Interest Income ◽  
Personal Savings ◽  
The Government

Significance This is high enough to worry the Central Bank of Russia (CBR): inflation has hovered around 4%, the bank's target level, for the last four years. The CBR has responded with monetary tightening, and the government with price controls on food and some exported commodities. Impacts Rising domestic interest rates and higher global oil prices will support the ruble. Elevated inflationary expectations will discourage long-term investment and personal savings. Higher interest rates will improve banks' net interest income and support banking profitability in 2021.

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