scholarly journals It’s Worse than "Reverse" The Full Case Against Ultra Low and Negative Interest Rates

2021 ◽  
pp. 1-26
Author(s):  
William White
Keyword(s):  
Interest Rates ◽  
Financial Stability ◽  
Bank Loans ◽  
Economic Costs ◽  
Potential Growth ◽  
Negative Interest Rates ◽  
High Inflation ◽  
Financial Cycles ◽  
Debt Deflation ◽  
Over Time

It is becoming increasingly accepted that lowering interest rates might at some point prove contractionary (the “reversal interest rate”) if lower lending margins cut the supply of bank loans. This paper argues that there are many other reasons to question reliance on monetary policy to provide economic stimulus, particularly over successive financial cycles. By encouraging the issue of debt, often for unproductive purposes, monetary stimulus becomes increasingly ineffective over time. Moreover, it threatens financial stability in a variety of ways, it leads to real resource misallocations that lower potential growth, and it finally produces a policy “debt trap” that cannot be escaped without significant economic costs. Debt-deflation and high inflation are both plausible outcomes.

Implications of Central banks’ negative policy rates on financial stability

2018 ◽  
Vol 10 (2) ◽  
pp. 310-320
Author(s):  
Benjamin S. Kay
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Financial Stability ◽  
Global Economy ◽  
Content Type ◽  
Interest Rate Policy ◽  
Trade Offs ◽  
Negative Interest Rates ◽  
Rate Policy ◽  
Negative Interest Rate Policy

Purpose While central bankers have widely discussed the trade-offs of negative interest rates on monetary policy, the consequences of negative rates on financial stability are less well understood. The purpose of this paper is to examine the likely and possible financial stability consequences of a negative rates policy with particular focus on banks, short-term funding markets, foreign exchange markets, asset managers, pension funds and insurers. Design/methodology/approach It draws from international experience with negative interest rates to identify financial stability threats posed to any economy by negative interest rates, and it also highlights where the US experience is likely to differ. Findings In time, financial market threats and other logistical issues of a negative interest rate policy can be managed or overcome. Even cumulatively, these threats are likely to be small as long as the rates remain only modestly negative. However, if the rates remain negative for long periods or they become more sharply negative, the rewards of avoiding negative rates increase. Originality/value Does the negative interest rate policy directly or through these challenges of implementation present a substantial obstacle to achieving financial stability objectives? As policy rates go negative in a greater share of the global economy, the financial stability consequences remain poorly understood and under discussed.

scholarly journals SMEs debt financing in the EU: on the eve of the coronacrisis

2020 ◽  
Vol 15 (3) ◽  
pp. 81-94
Author(s):  
Yevheniia Polishchuk ◽  
Anna Kornyliuk ◽  
Inna Lopashchuk ◽  
Alina Pinchuk
Keyword(s):  
Interest Rates ◽  
Financial Stability ◽  
Banking Sector ◽  
Debt Crisis ◽  
Debt Financing ◽  
Bank Loans ◽  
Eu Countries ◽  
Credit Lines ◽  
Level Data ◽  
Governmental Support

SMEs are the main drivers of economic development. As the debt crisis and coronavirus crisis show, despite their importance, they are extremely sensitive to economic downturns. Therefore, SMEs need to be supported through various tools. The paper is aimed at evaluating the SMEs’ bank and governmental support in the northern and southern EU countries in two crisis periods and assessing the financial state of SMEs on the eve of coronacrisis using micro-level data. It was proved that bank loans and credit lines remain the main sources of SMEs’ financing. After the debt crisis, banks are becoming more loyal to SMEs.It was proved that SMEs from the northern EU countries suffered less from the previous crisis and therefore started their recovery earlier than the southern ones in terms of profitability, liquidity and debt burden. In addition, it was shown that both groups on the eve of the new turbulence period were in better financial state compared to the previous debt crisis. The southern EU countries suffered more from both crises. At the same time, due to effective governmental support and bank loyalty, their SMEs entered the coronacrisis at the same level of financial stability as the northern ones. Since the new support measures are concentrated primarily in the banking sector through loan guarantee schemes and reduced interest rates, it is essential to provide debt financing to high-quality borrowers and avoid the debt crisis in southern counties.

scholarly journals Macroeconomic Policy at a Crossroads

2021 ◽  
Vol 65 (7) ◽  
pp. 5-15
Author(s):  
A. Kholopov
Keyword(s):  
Monetary Policy ◽  
Fiscal Policy ◽  
Interest Rates ◽  
Public Debt ◽  
Financial Stability ◽  
Macroeconomic Policy ◽  
Bank Lending ◽  
Central Banks ◽  
Fiscal Stimulus ◽  
Negative Interest Rates

The article examines macroeconomic policy options for advanced economies to respond to adverse shocks in the environment of very low interest rates and very high levels of public debt, when the scope for using conventional policy tools is limited. The standard transmission mechanism of monetary policy in the ELB conditions stops working normally, and the economy faces the “liquidity trap” effect. The deployment by central banks of unconventional monetary tools (forward guidance, quantitative easing, and negative interest rates) after global financial crisis was helpful in combatting the downturn, but carries risk of possible side effects. Large-scale purchases of financial assets lead to significant increase in central banks’ balance sheets, and this creates a threat to future financial stability and central bank independence. Negative interest rates can have detrimental effects on bank profitability and be contractionary through bank lending. There is a consensus that today fiscal policy has to play a major role in stabilizing the business cycle. But the effectiveness of conventional tools of discretional fiscal policy is uncertain because of long political lags and small spending multiplier. Existing automatic fiscal stabilizers are focused on social protection goals and not on macroeconomic stabilization. Thus, the newly proposed measures for rules-based fiscal stimulus (asymmetric semiautomatic stabilizers – tax or spending measures triggered by the crossing of some statistical threshold, e.g. a high unemployment rate) and unconventional fiscal policy (the use of consumption taxes to increase inflation expectations) have become the object of active discussion. Here lies the danger in the fusion of monetary and fiscal policy: central banks’ operations are becoming increasingly quasi-fiscal, aimed at financing budget deficit, and functions of monetary policy are proposed to assign to fiscal policy. Besides, the expansion of fiscal stimulus threatens financial stability in the future, as it leads to increase in public debt and narrows a country’s fiscal space.

Weak GDP growth makes case for more easing in Japan

2016 ◽  
Keyword(s):  
Interest Rates ◽  
Public Investment ◽  
Potential Growth ◽  
Content Type ◽  
Structural Problems ◽  
Residential Investment ◽  
Negative Interest Rates ◽  
Bank Of Japan ◽  
Low Expectations ◽  
Negative Factors

Significance The previous quarter's output was revised upward to 2.0% from the original 1.7%. For the first six months, Japan has grown at a bit more than 1.1% (annualised) -- above its predicted growth trajectory, given the decline of population and workforce. The Bank of Japan (BoJ) recently estimated Japan's potential growth rate at 0.21%, and the Cabinet Office put it at 0.3%. Given such low expectations, any negative factors such as weak exports can easily cause a contraction. Impacts Higher consumption depends on higher labour income, which is undermined by the increased use of non-regular workers. Negative interest rates stimulate residential investment and a front-loaded stimulus appears to have raised public investment. Falling numbers of hours worked, while jobs increased, demonstrates structural problems in the labour market.

The stimulus schemes will stress the financial system

2020 ◽  
Keyword(s):  
Interest Rates ◽  
Euro Area ◽  
Federal Reserve ◽  
Financial Stability ◽  
Asset Prices ◽  
Yield Curve ◽  
Corporate Debt ◽  
Content Type ◽  
Negative Interest Rates

Significance While the Federal Reserve (Fed) rejects negative interest rates, and instead considers yield-curve control, even the prospect of negative US rates is accentuating distortions in asset prices and fuelling concerns about global financial stability after the pandemic. Impacts The Fed’s decision to start buying corporate debt has led to a surge in bond issuance; many firms may struggle as the stimulus is unwound. Beyond Japan, the euro-area is nearest deflation; the ECB chief economist warns that demand will be low for some time. The VIX Index, a measure of upcoming US equities volatility, remains above its long-term average, but will be prone to spikes.

scholarly journals UNCONVENTIONAL MONETARY POLICY, COMPETITION AND FINANCIAL STABILITY. EVIDENCE FROM THE EUROZONE BANKS

2020 ◽  
Vol 38 (1) ◽  
Author(s):  
Ane Bakaikoa Pedrosa ◽  
José Manuel Mansilla Fernández
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Financial Stability ◽  
Unconventional Monetary Policy ◽  
Banking Competition ◽  
Negative Interest Rates ◽  
Core Country ◽  
Policy Competition

This article analyses the effects of the ECB’s negative interest rates (or unconventional) policy on the degree of banking competition, lending and deposit supply, and financial stability. Using a dataset comprising 191 Eurozone banks for the 2002Q1-2016Q4 period, our results suggest that negative interest rates (i) increase banks’ lending and deposit supply, (ii) reduce banking competition, and (iii) weaken financial stability. This phenomenon is economically more significant for periphery country banks than for core country banks.

scholarly journals CREDIT POLICY OF BANKS IN THE FUNCTION OF DEVELOPING THE ECONOMY OF REPUBLIC OF SRPSKA

2021 ◽  
Vol 19 (34) ◽  
Author(s):  
Dragana Bašić ◽  
Predrag Ćurić
Keyword(s):  
Interest Rates ◽  
Financial Stability ◽  
Banking Sector ◽  
Regulatory Compliance ◽  
Bank Loans ◽  
Credit Policy ◽  
Active Interest ◽  
The One ◽  
High Level ◽  
Republika Srpska

The banking sector of Republika Srpska features a high level of legal and regulatory compliance, and can be defined as conservative banking with deposits as the main source of business and loans as their fundamental product. The availability of funds for lending under favourable conditions in the economy is the fundamental and most important function provided by the banking sector, even though its role is crucial in executing payment transactions as well as providing security in savings products. As per expectations, quantitative analysis shows a very high level of correlation between the changes in the volume of bank loans and the changes in the gross domestic product in Republika Srpska. On the one hand, the credit policy of banks represents an important basis for the development of enterprises and the economy, and for the business of banks, on the other. Banks obtain the highest revenues from the active interest rates, and through defining an adequate credit policy with respect to the conditions existing in the economic environment, they can make their operations more secure and profitable. By using the data from the survey questionnaire, we investigated the extent to which the credit policy of banks affects the financial stability and business operations of companies in Republika Srpska.

Macroprudential Policy Instruments of Central Banks

2012 ◽  
pp. 32-47
Author(s):  
S. Andryushin ◽  
V. Kuznetsova
Keyword(s):  
Systemic Risk ◽  
Financial Stability ◽  
Financial System ◽  
Policy Instruments ◽  
Central Banks ◽  
Macroprudential Policy ◽  
Policy Studies ◽  
The Future ◽  
Financial Cycles

The paper analyzes central banks macroprudencial policy and its instruments. The issues of their classification, option, design and adjustment are connected with financial stability of overall financial system and its specific institutions. The macroprudencial instruments effectiveness is evaluated from the two points: how they mitigate temporal and intersectoral systemic risk development (market, credit, and operational). The future macroprudentional policy studies directions are noted to identify the instruments, which can be used to limit the financial systemdevelopment procyclicality, mitigate the credit and financial cycles volatility.

Five Mysteries Surrounding Low and Negative Interest Rates

CFA Digest ◽  
2017 ◽  
Vol 47 (8) ◽  
Author(s):  
Jakub M. Szudejko
Keyword(s):  
Interest Rates ◽  
Negative Interest Rates

Negative Interest Rates

2016 ◽  
Author(s):  
Anastasios Anastasopoulos
Keyword(s):  
Interest Rates ◽  
Negative Interest Rates
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