scholarly journals A Model of Monetary Transmission Mechanism

2020 ◽  
Author(s):  
Yuuki Maruyama
Keyword(s):  
Interest Rate ◽  
Lower Bound ◽  
Risk Aversion ◽  
Risk Premium ◽  
Market Price ◽  
Zero Lower Bound ◽  
Government Bonds ◽  
Total Investment ◽  
The Interest Rate ◽  
Interest Rate Channel

The point of this model is that total investment in the economy is not determined by the equilibrium of the interest rate alone, but by the equilibrium of both the interest rate and the market price of risk (risk premium). In this model, the lower the discount rate or risk aversion of people, the higher the total investment. This model shows that when the interest rate is not at the zero lower bound, the total investment is only slightly affected by people's risk aversion, but at the zero lower bound, the total investment is inversely proportional to people's risk aversion. In addition, this model is used to analyze monetary policy. It is shown that the interest rate channel and the credit channel can be analyzed with the same formula and the effect of the interest rate channel is small. This explains why a central bank can greatly increase the total investment with small changes in the interest rate. Additionally, this paper analyzes fiscal policy, helicopter money, and government bonds.

scholarly journals Constrained interest rates and changing dynamics at the zero lower bound

2019 ◽  
Vol 24 (2) ◽  
Author(s):  
Gregor Bäurle ◽  
Daniel Kaufmann ◽  
Sylvia Kaufmann ◽  
Rodney Strachan
Keyword(s):  
Interest Rate ◽  
Lower Bound ◽  
Interest Rates ◽  
Stochastic Volatility ◽  
Risk Premium ◽  
Information Criterion ◽  
The State ◽  
State Transitions ◽  
Zero Lower Bound ◽  
The Interest Rate

AbstractThe interaction of macroeconomic variables may change as nominal short-term interest rates approach zero. In this paper, we propose to capture these changing dynamics with a state-switching parameter model which explicitly takes into account that the interest rate might be constrained near the zero lower bound by using a Tobit model. The probability of state transitions is affected by the lagged level of the interest rate. The endogenous specification of the state indicator permits dynamic conditional forecasts of the state and the system variables. We use Bayesian methods to estimate the model and to derive the forecast densities. In an application to Swiss data, we evaluate state-dependent impulse-responses to a risk premium shock identified with sign-restrictions. We provide an estimate of the latent rate, i.e. the rate lower than the constraint on the interest rate level which would be state- and model-consistent. Additionally, we discuss scenario-based forecasts and evaluate the probability of exiting the ZLB region. In terms of log predictive scores and the Bayesian information criterion, the model outperforms a model substituting switching with stochastic volatility and another including intercept switching only combined with stochastic volatility.

The Case for Imposing Cashlessness: A Review Article

2018 ◽  
Vol 56 (4) ◽  
pp. 1587-1591
Author(s):  
Neil Wallace
Keyword(s):  
Fiscal Policy ◽  
Interest Rate ◽  
Lower Bound ◽  
Central Bank ◽  
Review Article ◽  
Zero Lower Bound ◽  
Illegal Activity ◽  
The Interest Rate

In The Curse of Cash, Rogoff (2016) makes two arguments. (i) Large denominations of currency are primarily used for illegal activity. Therefore, eliminating them would have benefits that far outweigh the costs in terms of lost seigniorage. (ii) The zero lower bound (ZLB) on the interest rate implied by the possibility of holding large amounts of currency is a costly constraint on central-bank policy. The best way to eliminate the ZLB is to eliminate all but small denominations of currency, ten dollars and lower, and to have those be in the form of coins. The style of the book, no models and no symbols, works fairly well for (i), but not so well for (ii). For (ii), the author is unclear about a crucial matter: what fiscal policy accompanies alternative interest-rate settings chosen by the central bank? ( JEL E26, E42, E43, E52, E58, E62)

scholarly journals The Empirical Implications of the Zero Lower Bound on the Interest Rate: The Case of the Czech Economy

2016 ◽  
Vol 64 (2) ◽  
pp. 603-616 ◽  
Author(s):  
Miroslav Hloušek
Keyword(s):  
Interest Rate ◽  
Lower Bound ◽  
Zero Lower Bound ◽  
Inflation Volatility ◽  
Percentage Points ◽  
Monetary Policy Rule ◽  
Tradable Sector ◽  
The Interest Rate ◽  
Macroeconomic Implications ◽  
Empirical Implications

This paper uses an estimated DSGE model of the Czech economy to study the macroeconomic implications of various shocks when the interest rate is constrained by the zero lower bound. The goal is to identify which shocks represent threats for the economy and how large the distortions are. The results show that four single shocks can take the economy to the zero lower bound, and that of the four, productivity shock in the tradable sector is the most dangerous. The consequences for the behaviour of macroeconomic variables are nontrivial and, quite naturally, increase with the size of the shock and the frequency of occurrence. If the economy is subject to all model specific shocks, there are distortions in terms of lower average values of output and consumption (by more than one percentage point) and higher inflation volatility (by more than six percentage points). To reduce these costs, the central bank should give higher weight to inflation and lower weight to the output gap in monetary policy rule.

scholarly journals General theory of geometric Lévy models for dynamic asset pricing

2012 ◽  
Vol 468 (2142) ◽  
pp. 1778-1798 ◽  
Author(s):  
Dorje C. Brody ◽  
Lane P. Hughston ◽  
Ewan Mackie
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Risk Aversion ◽  
Foreign Exchange ◽  
Market Price ◽  
Nonlinear Function ◽  
Rate Of Return ◽  
Pricing Kernel ◽  
Kernel Approach ◽  
The Interest Rate

The geometric Lévy model (GLM) is a natural generalization of the geometric Brownian motion (GBM) model used in the derivation of the Black–Scholes formula. The theory of such models simplifies considerably if one takes a pricing kernel approach. In one dimension, once the underlying Lévy process has been specified, the GLM has four parameters: the initial price, the interest rate, the volatility and the risk aversion. The pricing kernel is the product of a discount factor and a risk aversion martingale. For GBM, the risk aversion parameter is the market price of risk. For a GLM, this interpretation is not valid: the excess rate of return is a nonlinear function of the volatility and the risk aversion. It is shown that for positive volatility and risk aversion, the excess rate of return above the interest rate is positive, and is increasing with respect to these variables. In the case of foreign exchange, Siegel's paradox implies that one can construct foreign exchange models for which the excess rate of return is positive for both the exchange rate and the inverse exchange rate. This condition is shown to hold for any geometric Lévy model for foreign exchange in which volatility exceeds risk aversion.

scholarly journals INFORMATION VALUE OF THE INTEREST RATE AND THE ZERO LOWER BOUND

2019 ◽  
Vol 24 (7) ◽  
pp. 1758-1784
Author(s):  
Sang Seok Lee
Keyword(s):  
Interest Rate ◽  
Lower Bound ◽  
Information Structure ◽  
Information Value ◽  
New Keynesian ◽  
Zero Lower Bound ◽  
Keynesian Model ◽  
State Of The Economy ◽  
The Interest Rate ◽  
The Cost

Why is a zero lower bound episode long-lasting and disruptive? This paper proposes the interruption of information flow from the central bank’s interest rate decision to the private sector as a channel by which the destabilizing effect of the zero lower bound constraint on the nominal interest rate is amplified. This mechanism is incorporated into the new Keynesian model by modifying its information structure. This paper shows that the information loss at the zero lower bound can increase (a) the duration of the zero lower bound episodes and (b) the size of deflation and output gap loss. The result in this paper demonstrates that enhanced information sharing by the central bank about the state of the economy can be effective at alleviating the cost of the zero lower bound.

The Role of Different Channels in Transmitting Monetary Policy into Output and Price in Vietnam

2015 ◽  
pp. 20-40
Author(s):  
Vinh Nguyen Thi Thuy
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Interest Rate ◽  
Money Supply ◽  
Monetary Transmission ◽  
Impulse Response Functions ◽  
Short Run ◽  
The Exchange Rate ◽  
The Interest Rate ◽  
Interest Rate Channel

The paper investigates the mechanism of monetary transmission in Vietnam through different channels - namely the interest rate channel, the exchange rate channel, the asset channel and the credit channel for the period January 1995 - October 2009. This study applies VAR analysis to evaluate the monetary transmission mechanisms to output and price level. To compare the relative importance of different channels for transmitting monetary policy, the paper estimates the impulse response functions and variance decompositions of variables. The empirical results show that the changes in money supply have a significant impact on output rather than price in the short run. The impacts of money supply on price and output are stronger through the exchange rate and credit channels, but however, are weaker through the interest rate channel. The impacts of monetary policy on output and inflation may be erroneous through the equity price channel because of the lack of an established and well-functioning stock market.

scholarly journals The Empirical Implications of the Interest-Rate Lower Bound

2017 ◽  
Vol 2017 (083r2) ◽  
pp. 1-74
Author(s):  
Christopher J. Gust ◽  
◽  
Edward P. Herbst ◽  
J. David López-Salido ◽  
Matthew E. Smith
Keyword(s):  
Interest Rate ◽  
Lower Bound ◽  
The Interest Rate ◽  
Empirical Implications

scholarly journals Liquidity Choice and Misallocation of Credit

2019 ◽  
Vol 2019 (284) ◽  
Author(s):  
Ehsan Ebrahimy
Keyword(s):  
Interest Rate ◽  
Type I ◽  
Pareto Improvement ◽  
Government Bonds ◽  
High Interest Rate ◽  
Liquid Asset ◽  
Constrained Efficiency ◽  
Liquid Type ◽  
The Interest Rate

This paper studies a novel type of misallocation of credit between investments of varying liquidity. One type of investment is more liquid, i.e., its return is more pledgeable, and the other is more productive. Low liquidities of both investment types imply that the allocation of credit is constrained inefficient and that there is overinvestment in the liquid type. Constrained inefficient equilibria feature non-positive, i.e., one less than or equal the economy’s growth rate, and yet too high interest rate, too much investment and too little consumption. Financial development can reduce long-term welfare and output in a constrained inefficient equilibrium if it raises the liquidity of the liquid type. I show a maximum liquid asset ratio or a simple debt tax can achieve constrained efficiency. Introducing government bonds can make Pareto improvement whenever it does not raise the interest rate.

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