The methodology for assessing interest-rate policy rules: some comments

This paper is critical of the conceptual foundations and methodology adopted by Smithin (2020) in his exploration of the impact of different interest-rate policy rules on inflation. His modelling framework is too narrow to adequately discriminate between different interest-rate rules in terms of their broader macroeconomic impacts.

The methodology for assessing interest-rate policy rules: a reply

This note is a brief reply to Watts (2021), who has been critical of the conceptual foundations and methodology in a discussion of the impact of different interest rate policy rules on inflation in Smithin (2020). The reply concludes that the case for a ‘zero real policy rate of interest’ (ZRPR), rather than a ‘zero interest rate policy’ (ZIRP), emerges unscathed.

Causes, Effects And Prevention of Global Financial Crisis In Viewpoint of Islam

Global financial crisis is not a new phenomenon. The world has witnessed financial crisis since many centuries. The repetition of global financial crisis reveals that global financial setup is not stable thus, prone to frequent financial crisis. However, zero interest rate policy has been launched by developed countries in order to offset the effects of global financial crisis but to date the issue of financial and monetary instability has not been overcome. Interest rate as the main component of financial setup has adversely affected the permanent solution to global financial crisis. The study is undertaken to analyze the effect of interest rate (riba) in propagation of global financial crisis and to analyze the alternate financial mechanism to prevent global financial and economic crisis on permanent basis. However, the qualitative research methodology is pursued to build a conceptual framework by applying inductive paradigm to address the issue of understanding the rationale behind the prohibition of interest based financial paradigm particularly in regard to Islamic perspective. The expected outcome suggests that man-made laws in order to subside divine laws in financial paradigm have given rise to financial, ethical and economic crisis. Global financial crisis is the outcome of easy access to credit, abundance of loans upon interest, speculation, greed as well as corruptive motives to exploit each other.

NEUTRAL VALUE OF MONEY IN THE PRACTICE OF MONETARY REGULATION

The issue of estimating the level of neutral interest rates is a central issue for theoretical foundation of decision-making on interest rate policy in the practice of central banks. As a result of studying theoretical sources, research materials of international organizations and central banks, the factors of the neutral interest rate are systematized, the methods of its estimation are generalized, their advantages and disadvantages are revealed. Factors of the neutral rate are systematized according to the principle of their influence on the demand or supply of money in the economy. It has been established that there is no single generally accepted theoretical and methodological approach to determining the neutral rate in modern practice. A wide variation of methods with varying degrees of reliance on a theoretical basis (from purely mathematical filtration techniques to complex macroeconomic general equilibrium models) extends a field for new research. It is found that a key issue in neutral rate estimating models is the formalization of the relationship between the effects of external and internal factors, which is especially important for countries with a small open economy. Attention is paid to the method for estimating the neutral rate based on the rule of uncovered interest parity, which is used in the national practice of monetary regulation. Systemic shortcomings of this method are revealed on the basis of research of its theoretical bases and results of practical application in the conditions of the Ukrainian economy. The expediency of introducing into the practice of monetary regulation in Ukraine of alternative methodological toolkit for estimating the neutral rate based on the achievements of T. Laubach and J. Williams with adaptation to the open economy settings is justified, which would enhance the role of domestic factors, in particular changes in potential GDP and savings as important determinants of neutral value of money.

Bank business models, negative policy rates, and prudential regulation

Using data from Italian banks over the period 2011–2017, we study how negative interest rate policy and prudential regulation impact on bank business models. We report four key findings. First, banks shifted into retail- and market-oriented business models. Second, high- and low-deposit banks reduced loans and increased security/liquid assets; only market-oriented banks expanded lending. Third, interest rate income compression induced by negative rates has been substantial for the Italian banking system as a whole, although retail banks seem to have suffered less. Fourth, non-interest incomes played a compensatory effect. The portfolio reshuffling, as we observed for wholesale and retail banks (less lending and more securities/liquid assets), is related to the goal of reducing risk exposures and, in turn, the connected capital absorption required by prudential regulation.

A Structural Measure of the Shadow Federal Funds Rate

We propose a shadow policy interest rate based on an estimated structural model that accounts for the zero lower bound. The lower bound constraint, if expected to bind, is contractionary and increases the shadow rate compared to an unconstrained systematic policy response. By contrast, forward guidance and other unconventional policies that extend the expected duration of zero-interest-rate policy are expansionary and decrease the shadow rate. By quantifying these distinct effects, our structural shadow federal funds rate better captures the stance of monetary policy given economic conditions than a shadow rate based only on the term structure of interest rates.

Central bank interest policy: conceptual concepts and socio-economic context

The article reveals the goals and mechanisms of the interest rate policy of the central bank. The role of the discount rate in ensuring financial and macroeconomic stability is shown. The Taylor rule is presented and justified in a modified form, by including the money supply parameter in it. The phenomenon of negative interest rates is revealed.