Narrow Results

This paper investigates the factors that interact with interest rates. The results show that interest rates positively correlate with deviations in inflation, the logarithm of the real GDP (gross domestic product) ratio, the logarithm of the money supply ratio, deviations in unemployment rates, money velocity, deficit, and the dollar index. The interest rates negatively correlate with debt, the Dow Jones Industrial Average (DJIA), debt to GDP ratio, and real GDP growth rate. Regression analysis shows with statistical significance an increase in interest rates with deviations in inflation, money velocity, the dollar index, and a decrease with the DJIA. The analysis is refined by removing insignificant variables and addressing a multicollinearity problem. The results could provide governments and central banks with focal points for developing interest rate policies.

This paper examines the long-term as well as short-term equilibrium relationships between the major stock indices and selected macroeconomic variables (such as money supply and interest rate) of Singapore and the United States by employing the advanced time series analysis techniques that include cointegration, Johansen multivariate cointegrated system, fractional cointegration and Granger causality. The cointegration results based on data covering the period January 1982 to December 2002 suggest that Singapore's stock prices generally display a long-run equilibrium relationship with interest rate and money supply (M1) but a similar relationship does not hold for the United States. To capture the short-run dynamics of the relationship, we replicate the same experiments with different subsets of data representing shorter time periods. It is evident that stock markets in Singapore moved in tandem with interest rate and money supply before the Asian Crisis of 1997, but this pattern was not observed after the crisis. In the United States, stock prices were strongly cointegrated with macroeconomic variables before the 1987 equity crisis but the relationships gradually weakened and totally disappeared with the emergence of Asian Crisis that also indirectly affected the United States. The results of fractional cointegration and the Johansen multivariate system are consistent with the earlier cointegration results that both Singapore and US stock markets did possess equilibrium relationships with M1 and interest rate at the early days. However, the stability of the systems was disturbed by a series of well-known financial turbulence in the past two decades and eventually weakened for Singapore and completely disappeared for the US. This may imply that monetary authority may take action to respond to the asset price turbulence in order to maintain the stability of monetary economy and thus break the existing equilibrium between stock markets and macroeconomic variables like interest rate and M1. Another possible explanation is that the market became more efficient after 1997 Asian crisis. Finally, the results of Granger causality tests uncover some systematic causal relationships, implying that stock market performance might be a good gauge for Central Bank's monetary policy adjustment.

Many economists believe that federal government's budget deficits result in higher interest rates. This increase in interest rates can stifle private investment and impede the real rate of economic growth for the economy. This paper examines the potential impact of federal budget deficits on long-term interest rates for corporate bonds. The study is based on post-war annual US data, and employs a standard demand-supply model. The empirical results in our study provide evidence that the increasing budget deficits lead to higher interest rate for corporate bonds. In this regard, our study supports arguments for the crowding out theory.

The study attempts to evaluate the impact of short-term real interest rate on growth rate in India in a liberalized financial and trade regime (March 1993 to March 2005). Using ARDL approach to cointegration of Pesaran and Shin (1999), the study finds that interest rate does not have a direct impact; rather, it may have an indirect and adverse impact on growth rate through the transmission channel of bank credit, thereby neither supporting the arguments advocated by Keynesians nor the explanations offered by the proponents of Financial Liberalization School. This incredible result may be attributed to the poor quality of credit disbursal of the banking system in India or low credit offtake for productive investment purposes as investment, an important determinant of economic growth, is governed by several other factors.

The paper employs a methodology that enables the elicitation of the price and quantity of environmental capital (KN) at an aggregate macroeconomic level. The stock of KN considered here is confined to the air-shed of an economy that gets utilized in the process of economic growth. A time series study of the prices and quantities of KN enables an appreciation of the changing value of nature in economic growth. Despite improvements in the rate of utilization of KN, there is insufficient evidence of decreasing scarcity of KN in the case of both Australia and the United States.

The Fisher Effect postulated that real interest rate is constant, and that nominal interest rate and expected inflation move one-for-one together. This paper employs Johansen's method to investigate for the existence of a long-run Fisher effect in the Singapore economy over the period 1976 to 2006, and finds evidence of a positive relationship between nominal interest rate and inflation rate while rejecting the notion of a full Fisher Effect. The dynamic relationship between nominal interest rate and inflation rate is also examined from the error-correction models derived, and the analysis is extended to investigate the impulse response functions of inflation and nominal interest rates where we discover the presence of the Price Puzzle in the Singapore market.

This paper empirically investigates the relationship among the tax evasion and local disposal income, unemployment rate and demographic variables by using 20 municipalities in Taiwan with the official interior, latest, and wider range of panel data over the period from 1998 to 2011. The main findings support the positive impact of disposal income on tax evasion, while unemployment rate has a negative impact. Among the interest rate effect models, if policy-makers want to hinder the extension of tax evasion, they should reduce the interest rate. Furthermore, government not only applies fiscal policy but also applies monetary policy for improving tax evasion. In our regional effect model, we have found evidence on a positive impact of the demographic structure variables on tax evasion except social expenditure of local government. We have also found clear evidence on the positive impact in South and East areas on tax evasion in the regional effect model. Moreover, both interest rate and regional factors have an influence on tax evasion.

Considering 11 major Asian migrant sending countries during 1975–2012, the study explores the factors that motivate migrants to remit their earnings to home countries. Using panel regressions, it finds that it is primarily the growth rate and interest rate differentials between the home and host, the household consumption and financial sector development at home along with per capita income of host countries which lead to remittances inflows. It concludes that it is not only the altruistic (or consumption) and higher interest income motives; but also the patriotic motives reflected from significant impact of past remittances, are crucial factors of such flows.

This paper examines whether broader money supply (M2) and interest rate as two monetary policy tools may have differently affected housing prices in China. Empirical results show that there is a co-movement between housing prices and M2 in the short run and it becomes more pronounced after 2006 in the medium run. In addition, generally M2 positively affects housing prices. This supports the asset price channel which indicates that an easing monetary policy offers ample liquidity and results in raising the housing prices. The excess liquidity after 2008 spread to housing market, resulting in too much money chasing relatively few assets and triggering a surge in housing prices. On the other hand, we observe that co-movement between housing prices and interest rate is not very evident in most time. Moreover, we find that interest rate has a positive effect on housing prices which is not consistent with the user cost approach and indicates that a contracting monetary policy is not effective in curbing housing market. Not completely liberalized interest rate system and the high return on housing investments reduce the impact of interest rate on housing prices. These findings indicate that money supply is more effective than interest rate as channel to control the housing prices in China. The results are helpful for the scientific formulation of monetary policy for reasonable regulation of the market.

An empirical analysis on Eurodollar interest rates daily data in the time period 1990–1996, is performed and compared with Libor data in the time period 1984–1998. The complementary cumulative distributions for the daily fluctuations at different maturity dates and the Power Spectral Density are computed. We find that the probability distribution shows "fat" tails with non-Gaussian behaviours. Moreover, we study the correlations among Eurodollar interest rates fluctuations with different maturity dates. By using an original clustering linkage, we show how the collective motion of the interest rates curve can be analyzed in sub-groups of maturity dates with similar behaviours.

Fully sterilized intervention, an operation that involves a pure swap of foreign and domestic assets which leaves the money supply unchanged, gained it popularity through the experience among developed countries in the early 1980s. Ideally, it provides an independent policy tool that allows monetary authorities to pursue internal and external stabilization objectives simultaneously. In this paper, we employ a vector error correction model (VECM) to examine the dynamic interactions between exchange rate condition and policy reactions by Taiwanese monetary authorities, as Taiwan is ready to join the WTO and to help businesses take full advantages of e-commerce. We found that little efforts were made to sterilize interventions in the short term after an exchange rate shock occurred. The intention of not to sterilize interventions is to alleviate the exchange rate pressure by drastically changing domestic short term interest rates to force private sectors instantaneously adjust shares between domestic and foreign assets in their portfolios where there are speculative positions. Presumably, this official effort to avoid great fluctuations of exchange rates would offer businesses more freedoms in dealing with challenges in e-commerce environment. The result also suggests that, unlike the experience in developed countries, an independent monetary policy may not always be preferred by policy markers in small open economies.

This research employs VAR models, impulse response function, forecast error variance decomposition and bivariate GJR GARCH models, to explore the dynamic relationship between foreign investment and the MSCI Taiwan Index (MSCI–TWI). The estimations of the VAR, impulse-response functions and predicted error variance decomposition tests show that stronger feedback effects exist between net foreign investment and MSCI–TWI. In particular, our results demonstrate that the MSCI–TWI has the greatest influence over the decision-making processes of foreign investors. Also, we see that exchange rates exert a negative influence on both net foreign investment dollars and the MSCI–TWI. In addition, US–Taiwan interest rate difference has a positive influence on net foreign investment dollars and a negative influence on the MSCI–TWI. As for asymmetric own-volatility transmission, negative shocks in the MSCI–TWI tend to create greater volatility for itself in the following period than positive shocks. Our research indicates an asymmetric information transmission mechanism from net foreign investment to MSCI–TWI markets. Moreover, the estimated correlation coefficient shows that MSCI–TWI and net foreign investment dollar have a positive contemporaneous correlation.

The study contributes to the extant literature on interest rate pass-through in two ways. First, we examine the impact of the global financial crisis on the historical relationship between policy rate and the home lending rate. Second, we provide evidence from a hitherto unexplored OECD country (Australia) using data from recent years and provide new insights for advancing the pass-through literature. We found complete or near-complete pass-through in the money market rates and a statistically significant temporary change in the relationship between the policy rate and home lending rate since the onset of the financial crisis.

This is a speech that Dr. Fai-nan Perng delivered for the acceptance of an honorary Ph.D. degree in economics at National Tsing Hua University, Taiwan. Dr. Fai-nan Perng was appointed as the Governor of the Central Bank of the R.O.C. (Taiwan) by President Teng-hui Lee in February 1998. He served in this position for 20 years. During this 20-year period, he faced the 1998 Asian financial crisis, terrorist attack on the World Trade Center on September 11, 2001, and the 2008 U.S. financial crisis. He handled monetary policy smoothly and led the economic growth in Taiwan very well. Overall, he is one of the longest-serving and most well-known governors in the world. He represented Taiwan in the 2000 APEC Economic Leaders’ Meeting, was The Banker Magazine’s 2009 Central Banker of the Year, Asia, and received Central Banking Publications’ Lifetime Achievement Award in 2018. He also served as the associate editor for the Review of Pacific Basin Financial Markets and Policies (RPBFMP) from 2005 to 2018.

Asymmetric information increases the credit rationing of micro-enterprises. Lender–borrower relationships help to provide this information, thereby increasing the availability of loans. This study aims to investigate the relationship between micro-lenders and micro clients. It is accomplished by describing how such relationships are developed, and analyzing these relationships’ impact on the availability and credit term using multivariate regression. The results showed that the strength of lender–borrower relationships positively impacted credit access, but it did not significantly impact the credit term. Furthermore, the amount of income and loan purpose, as the proxies of business characteristics, negatively impacted credit access. These results highlight the critical role of the lender–borrower relationship and business characteristics in the risk management strategy and the sustainability of microfinance institutions.

This paper examines the behavior of the market equilibrium in an endowment economy in continuous time setting, in which a representative investor with exponential utility consumes the dividends generated by multiple risky assets. The dividends of the assets are assumed to be mutually independent and belong to a class of non-negative stochastic processes including square root processes and increasing Lévy processes. We then characterize expected returns and volatilities on the assets as well as interest rates which is defined by risk-free assets. Based on these quantities, we construct the capital asset pricing model in an infinitesimal time period and investigate the impacts of dividend fluctuations and the risk aversion of the investor to the market equilibrium. Numerical examples show that even if the dividends are independent, the asset returns may have strong positive correlations. Moreover, heterogeneous dividend processes generate Jensen’s alpha that can be viewed as the small cap premium.

I clarify and combine the results of Ilomäki (2016a) and Ilomäki (2016b) and find several interesting conclusions. First, the effect of the animal spirits component to the expected returns of investors depends on the risk-free rate. Second, there must be an upper limit for the risk-free rate, where the component that reduces the expected returns of informed investors in Ilomäki (2016a) disappears. Third, the empirical results of Ilomäki (2016b) indicates that the break-even level is as low as 3%.

Uncertainty is known to have negative impact on financial markets through its effects on investors’ decisions. In the wake of the “Great Recession”, quite a few recent studies have highlighted the role of uncertainty in predicting in-sample movements of interest rates. Since in-sample predictability does not guarantee out-of-sample forecasting gains, in this paper, we used historical daily and monthly data for the US to forecast mean and volatility of interest rate. The results show that changes in uncertainty measure movements fail to add any significant statistical gains to the forecast of interest rates for the US. In other words, policy makers in the US are not likely to improve their accuracy of future movements of the policy rate’s mean and volatility by incorporating information derived from changes in metrics of uncertainty.

Principal component analysis (PCA) is one of the most important methods in analyzing and forecasting the term structure of interest rates. However, there are strong indications that it is not adequate to estimate interest rate factors by traditional PCA when there is time dependence and measurement errors. To correct these problems, it is recommended to use the long-run covariance matrix to estimate the principal components, extracting the correct covariance structure present in these processes. In this work, we show that out-of-sample forecasts for the term structure of interest rates constructed with the PCA using long-run covariance matrices appear to be more accurate compared to predictions based on static covariance matrices.

The two-additive-factor Gaussian model G2$++$ is a famous stochastic model for the instantaneous short rate. It has functional qualities required in various practical purposes, as in Asset Liability Management and in Trading of interest rate derivatives. Though closed formulas for the prices of various main interest-rate instruments are known and used under the G2$++$ model, it seems that references for the corresponding sensitivities are not clearly presented over the financial literature. To fill this gap is one of our purposes in the present work. We derive here analytic expressions for the sensitivities of zero-coupon bond, coupon-bearing bonds, portfolio of coupon bearing bonds. The sensitivities under consideration here are those with respect to the shocks linked to the unobservable two-uncertainty shock risk/opportunity factors underlying the G2$++$ model. As a such, the hedging of a position sensitive to the interest rate by means of a portfolio (in accordance with the market participants practice) becomes easily transparent as just resulting from the balance between the various involved sensitivities.