scholarly journals Using Expected Geometric Values to Calculate the Cost of Interest in Hyper-inflationary Environments: the Case of Venezuela

2019 ◽  
Vol 2 (2) ◽  
pp. 10-21
Author(s):  
J. Tim Query ◽  
Evaristo Diz Cruz
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Expected Value ◽  
Defined Benefit ◽  
High Inflation ◽  
Defined Benefit Plans ◽  
The Interest Rate ◽  
The Cost ◽  
The Impact ◽  
The Relationship

It is of vital importance to explore the relationship between pensions and inflationary levels because this forms a link between social policy and economic development in the context of Venezuela’s challenging economy and its impact on the development of pension systems. With such rampant inflation, companies must adjust the rates of salary increases to avoid a significant decrease in the purchasing power of income from defined benefit plans. Our research seeks to find the possibility of using an average geometric rate of future interest rates expressed as an expected value to discount obligations. Consequently, the cost of interest associated with the actuarial liability of the Benefit plans increases substantially in the next fiscal period to the actuarial valuation, sometimes compromising its sustainability over time. In order to minimize this problem, two scenarios for calculating the interest rate are proposed to smooth out this volatile effect; both are based on a geometric average with the expectation of working life or with the duration of the obligations. We are careful to use a reasonable interest rate that is not so high as to compromise the cash flow, resulting in skewed annual results of the companies. Our research seeks to find the possibility of using an average geometric rate of future interest rates expressed as an expected value to discount obligations. We formulate and actuarially evaluate two different scenarios, based on job expectations and Macaulay's duration, of the obligations that allow the sustainability of the plan in an environment of extremely high inflation. To illustrate the impact of the basic annual expenditure of the period, the results of an actuarial valuation of an actual Venezuelan company were utilized. Despite some companies adjusting their book reserves increasingly through a geometric progression, the amounts associated with the costs of interest would be huge in any such adjustment pattern. Therefore, we suggest adoption of one of the alternatives described in the research.

The effect of negative policy rates on the interest-rate pass-through mechanism in the eurozone

2019 ◽  
Vol 7 (2) ◽  
pp. 247-262 ◽  
Author(s):  
Yannis Panagopoulos ◽  
Ekaterini Tsouma
Keyword(s):  
Interest Rate ◽  
Central Bank ◽  
Interest Rates ◽  
Money Market ◽  
Negative Interest Rates ◽  
Time Period ◽  
Pass Through ◽  
The Interest Rate ◽  
The Impact ◽  
The Relationship

This paper examines the impact of the June 2014 switch to negative interest rates (NIRs) by the European Central Bank (ECB) on the operation of the eurozone interest-rate pass-through (IRPT) mechanism. We focus on the relationship between major central-bank policy rates and selected money-market rates. That link is identified as the first stage of the IRPT mechanism and its dynamics are analysed using Granger causality and cointegration techniques for the time period January 2000–June 2017. Our empirical findings indicate a feedback relationship between the ECB policy and the money-market rates in the period prior to June 2014, but that relationship is non-operative when considering only the period of NIRs.

scholarly journals Interest Rate in Pension Plan Premium Calculation

2020 ◽  
Vol 21 (1) ◽  
pp. 40-45
Author(s):  
Khafsah Joebaedi ◽  
Kankan Parmikanti ◽  
Agus Supriatna ◽  
Fauzi Akhmad ◽  
Badrulfalah Badrulfalah ◽  
...  
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Pension Plan ◽  
Defined Benefit ◽  
Life Annuity ◽  
Defined Benefit Pension Plan ◽  
Rate Relationship ◽  
Premium Calculation ◽  
The Interest Rate ◽  
The Relationship

This research aims to analyze the relationship between the interest rate relationship is inversely proportional to the amount of the premium on the pension plan. The method used is to measure several variables, among others FSL (Future Service Liability), PVFSAL (Present Value Future Salary), PR (Pension Rate) and Premiums. Calculation, life annuity uses actuarial assumptions, one of which is the interest rate assumption, if the assumptions used are not in accordance with the actual conditions, then what happens is excessive payments or deficient payments. The interest rate has an influence in the process of calculating the defined benefit pension plan premium. Using the assumption of different interest rates (11%, 12 % and 13%), it is found that the interest rate relationship is inversely proportional to the amount of the premium. The results of this study are FSL, PVFSAL, PR and Premiums for the interest of 11%, 12% and 13% (participants aged 25 years) as follows 720,187.97; 554,000,24; 430,570.07 (FSL in Rupiah); 27,155,187.70; 24,922,770,59; 23,002,699.40 (PVFSAL in Rupiah); 2.6521; 2.2229; 1.8718 (PR in%) and 55,535.38; 46,546.85; 39,196.00 (Premiums in Rupiah)The higher the interest rate, the smaller the pension premium and vice versa.

scholarly journals The Impact of Interest Rate Ceilings on Microfinance Industry

2015 ◽  
Vol 2 (2) ◽  
pp. 10
Author(s):  
Ali Saleh Alshebami ◽  
D. M. Khandare
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Low Income ◽  
Secondary Data ◽  
Research Subject ◽  
Access To Credit ◽  
The Poor ◽  
Good Intention ◽  
The Interest Rate ◽  
The Impact

<p>Imposing ceilings on the interest rate has recently become one of the new hottest topics in microfinance industry; various debates have been discussing this issue to know the effect of interest rate ceilings on the supply of credit in particular and on microfinance industry in general. However in spite of the good intention behind these ceilings, there was no absolute result stating that ceilings have really contributed to the improvement or protection of the poor clients, indeed, these ceilings have hurt those low income people instead of helping them, due to these ceilings most of MFIs left the market or reduced their scale due to the inability to continue operating with low interest rate leaving the very poor clients without access to credit. Thus, the purpose of this paper is to review the impact of imposing such ceilings on the interest rates and to find out what alterative solutions can be employed as substitutes for them. This paper is entirely based on the secondary data collected from various records related to microfinance such as microfinance books, official websites and reports, published papers, and other sources related to the research subject.</p>

scholarly journals Asymmetric Effect in the Relationship between Oil Prices and Activity: An Estimate of the VECM Model for Eight Emerging Countries

2019 ◽  
Vol 9 (2) ◽  
pp. 92
Author(s):  
Mouldi Djelassi ◽  
Mdalla Omrani
Keyword(s):  
Interest Rates ◽  
Oil Prices ◽  
Emerging Countries ◽  
Oil Shocks ◽  
Asymmetric Effect ◽  
Long Run ◽  
The Interest Rate ◽  
Asymmetrical Impact ◽  
The Impact ◽  
The Relationship

In this study, we attempt to study the impact of oil shocks on the economic activity of eight emerging countries with different importing and exporting profiles, targeting and non-targeting inflation and thus verify the hypothesis of non-linearity. To do this, we used the VECM methodology. In addition to oil prices (the linear variation and its volatility, positive and negative movements in prices), we introduced the interest rate and industrial production as a proxy variable of the activity. The result shows that the economies of these countries are generally more sensitive to net increases in oil prices than to their volatility. Thus, the asymmetrical impact is clearly proven in the results especially in the long run. If the rise in oil prices negatively affects production, the decline does not favor its reshuffle. Indeed, if increases in oil prices reduce economic growth, their declines have no expansionary effect. In addition, the distinction between exporting and importing countries is not obvious. Furthermore, the addition of interest rates indicates that the first prefigurations indicate a tightening of interest rates by the central banks of the target and non-target countries selected in our study.

scholarly journals The Ability of Selected European Countries to Face the Impending Economic Crisis Caused by COVID-19 in the Context of the Global Economic Crisis of 2008

2020 ◽  
Vol 13 (8) ◽  
pp. 179
Author(s):  
Róbert Oravský ◽  
Peter Tóth ◽  
Anna Bánociová
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Economic Crisis ◽  
Economic Effects ◽  
European Countries ◽  
Consumer Confidence ◽  
Negative Consequences ◽  
Confidence Index ◽  
The Interest Rate ◽  
The Impact

This paper is devoted to the ability of selected European countries to face the potential economic crisis caused by COVID-19. Just as other pandemics in the past (e.g., SARS, Spanish influenza, etc.) have had negative economic effects on countries, the current COVID-19 pandemic is causing the beginning of another economic crisis where countries need to take measures to mitigate the economic effects. In our analysis, we focus on the impact of selected indicators on the GDP of European countries using a linear panel regression to identify significant indicators to set appropriate policies to eliminate potential negative consequences on economic growth due to the current recession. The European countries are divided into four groups according to the measures they took in the fiscal consolidation of the last economic crisis of 2008. In the analysis, we observed how the economic crisis influences GDP, country indebtedness, deficit, tax collection, interest rates, and the consumer confidence index. Our findings include that corporate income tax recorded the biggest decline among other tax collections. The interest rate grew in the group of countries most at risk from the economic crisis, while the interest rate fell in the group of countries that seemed to be safe for investors. The consumer confidence index can be considered interesting, as it fell sharply in the group of countries affected only minimally by the crisis (Switzerland, Finland).

On the Judicial Interest Rate: Towards a Law and Economic Theory

2013 ◽  
Vol 4 (1) ◽  
pp. 34-62
Author(s):  
Hugo A Acciarri ◽  
Nuno Garoupa
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Law And Economics ◽  
Policy Instruments ◽  
Institutional Settings ◽  
Rules Of Procedure ◽  
The Interest Rate ◽  
Substantive Law ◽  
The Impact ◽  
Neutral Effect

AbstractWhile all legal systems implement a form of pre-judgment or post-judgment interest, there is a dearth of literature on substantive law and economics analysing the impact, functioning, and assessment of the judicial interest rate. Current legal scholarship typically views the interest rate as having a neutral effect on private and social costs. This paper demonstrates that the issue is theoretically far more complex and largely influential in legal policy. Due to the asymmetric opportunity costs for each party in a case, judicial interest rates may lead to improper delay of proceedings or the decoupling of damages from recovery. These potential results influence the number of settlements and suits. On this ground, we compare different institutional settings from an economic perspective and conclude that the appropriate mechanism depends on the alternative policy instruments available, namely, the rules of procedure, court fees, or mechanisms for appropriately setting damages. Further, we argue that abolishing the statute which sets pre-judgment interest may be a proposal worth considering.

scholarly journals A Tax-Based Estimate of the Elasticity of Intertemporal Substitution

2013 ◽  
Vol 03 (01) ◽  
pp. 1350001 ◽  
Author(s):  
Jonathan Gruber
Keyword(s):  
Time Series ◽  
Interest Rate ◽  
Interest Rates ◽  
Consumer Expenditure ◽  
Intertemporal Substitution ◽  
Tax Rate ◽  
Elasticity Of Intertemporal Substitution ◽  
Using Data ◽  
The Interest Rate ◽  
The Impact

One of the most important behavioral parameters in macroeconomics is the elasticity of intertemporal substitution (EIS). Starting with the seminal work of Hall (Hall, R., 1978, Stochastic Implications of the Life Cycle — Permanent Income Hypothesis: Theory and Evidence, Journal of Political Economy 86, 971–987), researchers have used an Euler equation framework to estimate the EIS, relating the growth rate of consumption to the after-tax interest rate facing consumers. This large literature has, however, produced very mixed results, perhaps due to an important limitation: The impact of the interest rate on consumption or savings is identified by time-series movements in interest rates. Yet the factors that cause time-series movements in interest rates may themselves be correlated with consumption or savings decisions. I address this problem by using variation across individuals in the capital income tax rate. Conditional on observable characteristics of individuals, tax rate movements cause exogenous shifts in the after-tax interest rate. Using data on total non-durable consumption from the Consumer Expenditure Survey over two decades, I estimate a surprisingly high EIS of two. This finding is robust to a variety of specification checks.

scholarly journals An Insight Regarding Economic Growth and Monetary Policy in Romania

2015 ◽  
Vol 62 (s1) ◽  
pp. 85-95 ◽  
Author(s):  
Valentina Mera ◽  
Monica Pop Silaghi
Keyword(s):  
Economic Growth ◽  
Monetary Policy ◽  
Interest Rate ◽  
Sacrifice Ratio ◽  
National Bank ◽  
Potential Gdp ◽  
The Interest Rate ◽  
The Cost ◽  
The Impact ◽  
The Sacrifice

Abstract This study introduces some aspects regarding the link between monetary policy and economic growth, through a rule well known in the literature which is named Taylor’s rule and through the concept of sacrifice ratio which encompasses the impact of the cost of disinflation on the economic growth of a country. In this paper, we rely on estimates of the growth of potential GDP of the National Bank of Romania for the period 2003-2006 while for the period 2007-2012 we rely on the estimates reported by the International Monetary Fund. Thus, we carry a deterministic exercise for computing the interest rate on the period 2003-2012 as depicted from the Taylor’s rule and we compare it with the effective monetary policy interest rate used by the National Bank of Romania. In the same time, we calculate the sacrifice ratio for the period 1997-2013 so as to be able to form an opinion regarding the cost of disinflation and its comparison with the typical estimates for larger time spans and for other countries.

scholarly journals Inflation Instability Impact on Interest Rate in Egypt: Augmented Fisher Hypothesis Test

2017 ◽  
Vol 5 (1) ◽  
pp. 1 ◽  
Author(s):  
Doaa Akl Ahmed ◽  
Mamdouh Abdelmoula M. Abdelsalam
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Negative Impact ◽  
Hypothesis Test ◽  
Portfolio Theory ◽  
Expected Inflation ◽  
Fisher Hypothesis ◽  
The Interest Rate ◽  
The Impact ◽  
Autoregressive Conditional Heteroscedasticity

The paper aims at examining an augmented version of Fisher hypothesis that include inflation instability. According to this hypothesis, there is a positive relation between interest rates and expected inflation. In contrast, there is a debate regarding the impact of inflation uncertainty on interest rate. According to the portfolio theory and models of asset pricing, inflation instability positively affects the interest rate. The reason is that risk-averse investors must be compensated with higher returns for higher risks. In contrast, the loanable funds theory implies a negative impact of inflation instability and interest rates since high uncertainty leads consumers to protect themselves against inflation by raising their savings which lowers consumption and interest rates. To compute inflation volatility, we applied different Autoregressive Conditional Heteroscedasticity models. The simple and augmented versions of Fisher hypothesis are examined using Markov Switch Model to account for possible regime shift in that relationship. For the original Fisher hypothesis, there is an evidence of supporting it in the first regime while that hypothesis does not hold in the second one. In the augmented version of Fisher hypothesis, portfolio theory hypothesis is verified in the first regime whereas the loanable funds hypothesis is confirmed in the second one.

Korean Treasury Bond Futures Pricing Model

2004 ◽  
Vol 12 (1) ◽  
pp. 1-22
Author(s):  
Youngsoo Choi ◽  
Se Jin O ◽  
Jae Yeong Seo
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Market Price ◽  
Alternative Methods ◽  
Vasicek Model ◽  
Market Participants ◽  
Treasury Bond ◽  
Cost Of Carry ◽  
The Interest Rate ◽  
The Cost

This paper proposes two alternative methods which are used for pricing the theoretical value of the KTB futures on the non-traded underlying asset; first method is to use the CKLS model, under which the volatility of interest rate changes is highly sensitive to the level of the interest rate, and then employ binomial trees to compute the theoretical value of futures, second one is to use the multifactor Vasicek model considering correlations between yields-to-maturity and then employ the Monte Carlo simulation to compute it. In the empirical study on KTB303 and KTB306, an CKLS methodology is superior to the conventional KORFX method based on the cost-of-carry model in terms of the size of difference between market price and theoretical price. However, the phenomena, the price discrepancy using the KOFEX methodology is very small for all test perlod, implies that the KOFEX one is being used for the most market participants. The reasons that an multifactor Vasicek methodlogy is performed poorly in comparison to another methods are 1) the Vasicek model might be not a good model for explaining the level of interest rates, or 2) the important point considered by the most market participants may be on the volatility or interest rate, not on the correlations between yields-to-maturity.

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