the interest rate

The data used in this research consist of monthly series of two policy rates , namely the Treasury bill rate of different maturities (from one to six months : Tbr-1m,Tbr-3m and Tbr-6m ) and the Repo rate along with three bank rates (interbank , deposit and lending rates) collected from tables published by the National Bank of Rwanda. Interbank rate denominated as INTBAN, deposit rates of different maturities (from one to six months: Dr-1m, Dr-3m and Dr-6m) and lending rates of short, medium and long term (LRSHT, LRMED and LRLOT) have been considered for analysis. The data cover the sample period 2008-1 to 2016-12. This period has been chosen for two main reasons. First, the repo rate has been introduced in 2008 as a new monetary policy instrument. Second, during this period, the main reforms in the financial sector had been completed and the Central Bank had gained its full independence and relied more on the interest rate for conducting monetary policy. The choice of policy variables can be motivated as follows. In the current monetary policy framework, the key repo rate is the instrument used to signal the monetary policy stance of the National Bank of Rwanda. However, the key repo rate is announced on a quarterly basis and may remain unchanged for long time periods, which makes it less suitable for econometric purposes. By contrast, the Repo rate is dynamic since it is used by the National Bank of Rwanda in the open market operations as the main instrument to signal the financial conditions in the money markets on a daily basis; therefore, the Repo rate is considered as the main policy rate in this study. The Treasury bill rate of different maturities has also been used as policy rate since it has been argued in the literature that in the long-run, banks set their retail prices in line with their marginal cost, i.e. the funding cost on loans and opportunity cost of deposits, which can be best estimated by money market rates reflecting market conditions (De Bondt, 2005).

It is now a well-known fact from a theoretical and empirical perspective that monetary policy affects real sector variables of inflation and output through various channels. Chief among these channels are the interest rate, exchange rate and the credit channels. A number of studies have attempted to study the monetary policy transmission mechanism in Zambia (Chileshe et al., 2014; Zgambo and Chileshe, 2014; Mutoti, 2006; and Simatele, 2004). All these studies focus on investigating the effects of monetary policy on broad money, inflation and economic activity etc. However, the success of monetary policy crucially depends largely on the stickiness of retail interest rates (Aziakpono and Wilson, 2013). In particular, for monetary policy to be effective changes in the policy rate should be quickly transmitted to retail rates and that the magnitude of the change passed on should be large enough to affect aggregate demand and consequently economic activity and inflation (Lim, 2001). Literature has shown that; if the interest rate pass-through (IRPT) is weak, monetary policy tends to be ineffective in affecting real sector variables (Marotta, 2009; Mishra et al., 2013). Therefore, in order to make monetary policy more effective it is cardinal to establish the degree of the IRPT and thereafter enhance it.

With the abolishment of interest-rate controls, the PBC is building its interest-rate corridor system. In 2015, the PBC started to talk that it would “explore an interest -rate corridor mechanism, enhance the interest-rate adjustment capability, and improve the mechanism for the transmission of central-bank policy rates to the financial market and the real economy ” (China Monetary Policy Report 2015Q4: 65). At the ceiling of the corridor is the interest rate of the standing lending facility (SLF) that was introduced in early 2013, at the floor is the interest rate that the PBC pays on banks’ excessive reserves (currently at 0.72%), and, most important, there would be a market-determined interest rate above the floor and below the ceiling. Through the SLF, the central bank can inject liquidity to the money market, 19 while banks can withdraw liquidity from the money market at the lower bound of the corridor when the money market interest rate falls below this level. The PBC’s open market operations would be transmitted to the money market interest rate that is market-determined, but lies within the upper and lower bounds. Yet, the PBC has never clearly announced which money market interest rate that it is targeting. Neither has it ever announced the explicit target value of the money market interest rate (see also Sun 2018).

ii. The interest rate path alone does not reflect the stance of the monetary policy in a banking crisis. If we only look at the paths of the interbank rate, a Taylor rule with a negative IOR keeps the interbank rate not only longer at the lower bound but also lower in every period in comparison to a mixed rule in this section (Figure 4a). If we follow the common New Keynesian logic, inflation should have been higher in the previous experiment. However, this is not the case here. When we model explicitly the microfoundation in the banking sector, the link between the money supply and the interest rate is not as tight as the one in the New Keynesian literature. Money supply is not determined solely by the central bank. Moreover, the central bank do not control the interest rate by directly changing the money supply here.

I create a model where private banks face adjustment costs in nominal interest rates. The model’s inflation responds to interest rate changes (both nominal and real) by mov- ing in the opposite direction. That response justifies the Taylor rule and explains, through credit conditions, the procyclicality of inflation. The model permits the analysis of dif- ferent types of monetary policy using a variable inflation target. I use this feature to simulate different policies and compare them to interest rate data from the last century. The interest rate rigidity model leads to credit-conditions-driven inflation, which I be- lieve is more realistic than competing models of inflation.

Rate of interest has always been featured as one of the important considerations in explaining the saving behavior of individual. The higher the rate of interest, the more money will be saved, since at higher interest rates people will be more willing to forgo present consumption. Interest rate risk is a major issue that needs serious attention from the bank. [7] illustrated that changes in interest rates may affect the bank both in terms of income and economic value. As in [3] stated that the constant increase in the interest rate will cause some problems, such as; the rising cost of funds of banks, because the banks have to pay more to attract new customers and retain existing customers. [8] stated that the risk rate of return is the most important risk faced by Islamic banking compared to other risks such as operational risk and liquidity risk.

Overall, the results in Table 5 show each bank experiences at least one yearly linear or nonlinear exposure to the exchange rate and interest rate movements. Thus, our approach generates a much stronger association betwe en banks’ stock returns and exchange rate changes than previous studies in the literature (see, for example, Choi and Elyasiani 1997; Au Yong et al. 2009; Wong et al. 2009). Furthermore, we show that Chinese banks are exposed linearly and nonlinearly to the interest rate movement and these exposures are more pronounced following the orthogonalisation of market returns. Finally, the Chinese banks’ exposure to interest rate changes remains largely time varying, with the weakest exposure reported in year 2007 and the strongest reported in year 2012. The lack of interest rate risk exposure in the earlier sample period coincides with the period of a heavy involvement of the Chinese central bank in controlling lending and borrowing interest rates. We attribute the recently increase in the interest rate exposure of Chinese banks to the increased demand for mortgages in China, which has led the PBOC to remove the floor restrictions on lending rate.

When setting the volatility surprise as the policy instrument, we are not intended to pre- sume that the Federal Reserve attempts to control or manipulate expected volatility of an interest rate. Instead, the Federal Reserve’s communication, such as communication styles, languages in the summary of economic projections and more, may contribute to the exoge- nous impact of monetary policy on financial markets. In the SVAR model, as unexpected by economic agents other than the Federal Reserve, the influences of communication in FOMC announcements constitute a portion of exogenous monetary policy shocks to the VAR sys- tem. These effects thus should be incorporated to identify the monetary policy shocks. The two monetary policy surprises demonstrate two distinctive and orthogonal dimensions of the impact of monetary policy announcements, such as the influence on short rates level versus the effects on long rate volatility. Another critical difference between the two monetary pol- icy surprises is the measuring objects. The policy rate surprise lasers the focus on changes in the policy rate, while the volatility surprise comprehensively evaluates monetary policy announcements in terms of the risk implication. In the model, we stimulate monetary pol- icy shocks with the policy rate surprise in the credit channel and the interest rate channel. Both channels are characterized by a Taylor rule type of monetary policy reaction function. On the contrary, the risk-taking channel accepts a broader definition of monetary policy. Therefore, the volatility surprise is ideal for initiating the monetary policy shocks in the risk-taking channel in order to investigate the risk-side monetary policy transmission.

However, the author has compiled according to relevant data. Through hu- man intervention, the interest rate of deposits is lower than the inflation rate during the same period, resulting in a negative real interest rate. As a result, the cost of commercial banks’ storage and storage can be reduced, and the lending rate can be reduced accordingly. Since investment is a function of the reduction in interest rates. The reduction of interest rates will inevitably increase the in- vestment demand of interest-sensitive entities. The multiplier effect will double the GDP, and the rapid growth of the economy will further push up the inflation rate, resulting in a further decline in real interest rates, thus forming a channel for interest rate down. The interest rate sensitive entities mentioned here mainly include enterprises, governments, individual consumers, and overseas investors. For enterprises, the reduction of interest rates reduces the financing costs of en- terprises, which makes the investment projects with lower marginal efficiency of capital become more profitable and expands the scope of investment, which will promote economic development through multiplier effect; For the government, the government is also a major body of social investment and financing. The re- duction in interest rates directly leads to a reduction in the cost of borrowing, which will stimulate a large increase in government infrastructure investment, which in turn will lead to an increase in the economy. For individual consumers, the reduction in interest rates can alleviate the financial pressure on buying houses and increase the demand for home purchases. To promote housing pric- es and promote the development of the real estate industry, and to promote the development of the upstream and downstream industries; for overseas investors, economic development will greatly increase new investment opportunities, and lower interest rates will reduce their investment costs. Foreign capital inflows will also promote large economic growth.

Abstract: Machaj (2015) does a great service in pointing out a key assumption, heretofore unaddressed, in Filleule (2007) and Hülsmann (2010). Machaj errs, however, in stating that who saves will have an ambiguous effect on the interest rate and that where savings are directed can have ambiguous effects on the length of production. In this brief comment I will first show that who saves will have no effect on the interest rate. I then turn my attention to what it means to “lengthen” the structure of production. Although extended production time or additional “stages” of production make convenient placeholders for increased roundaboutness, they fail to grasp the core concept as it pertains to capital theory – what is it about production processes that makes more or better consumer goods?

monetary policy. It is often suggested in policy circles that monetary policy should be used, to some extent, to mitigate fluctuations in the nominal exchange rate. Indeed, there is some empirical evidence that central banks do follow policy rules which include a role for the exchange rate. For instance, Lubik and Schorfheide (2005) and Bergin (2004) find evidence that the Federal Reserve, the Bank of Canada and the Bank of England follow policy rules which include a positive feedback term in the exchange rate. This indicates that policy has been, to some extent, directed towards stabilising the nominal exchange rate for these countries. In the context of this paper, this suggests that it is interesting to analyse the welfare implications of adding an exchange rate term into the interest rate rule. A number of theoretical papers have also considered the role of the exchange rate in policy rules. The conclusions reached in this line of literature are rather mixed. Ball (1999) suggests that including the exchange rate brings a relatively large benefit, while others such as Adolfson (2002), Batini, Harrison and Millard (2003) and Leitemo and Söderstrom (2005) report only minor improvements from including the exchange rate in the rule. Taylor (2001) also concludes that including a direct feedback term on the exchange rate only brings a minor benefit.

In this work, the attention is drawn to another aspect of the interest rate pass-through, which so far has been largely ignored by the empirical literature. While it is commonly acknowledged that the effectiveness of monetary policy may vary across countries (van Leuvensteijn et al., 2008; Sorensen and Werner, 2006; Sander and Kleimeier, 2006, 2004, 2002; Mojon, 2000; Cottarelli and Kourelis, 1994), the possibility that the nature of interest pass-through process could be heterogeneous at the intra-national level received much less attention. One of the possible reasons is the constraints posed by data limitations at a regional level, see e.g. Dow and Montagnoli (2007); nevertheless one could expect that, especially in large countries with heterogeneous regional economic structures, the interest rate pass-through may vary from region to region. In fact, the regional credit market depends on the regional composition of the financial sectors, hence the supply curve may differ across regions and therefore a change in the official interest rate can affect the cost and availability of credit more in some regions than others.

The interest rate spreads (measured as the difference be- tween deposit and lending rates) not only indicate the level of inefficiency of the banking sector but show the level of development of the financial system. Bank inter- est rate spreads have several important implications for growth and development of any economy. Specifically high interest rate spreads tend to discourage potential savers and thus limiting the quantum of funds available to potentials investors. A reduction in lending arising from low savings often leads to low investment and thus the economic growth rate [1-3]. Incidentally, interest rate spreads in Nigeria increased by a large amount over the study period 1 . However, not many studies have been un- dertaken to analyze the main factors underlying the high interest rate spreads in the country. There is the need to fill this gap. Hence, the main objective of this paper is to investigate the issue of the determinants of interest rate spreads in Nigeria.

As a result, the Lognormal Forward LIBOR Model (see [13], hereafter referred to as LFM, but also called BGM-Jamshidian Model) was introduced in 1997 to generate log-normal behavior to the forward LIBOR rate. It was the first compatible model with the Black formula and the first Market Model in which dynamics of a tradable asset is specified. This model was widely used and once accepted as a market standard model by the market practitioners. However, in the late 1990s a new dimension has been added to the interest rate options, that is, the smile/skew curve in the implied volatility of Caplets and Swaptions across the strike. The main problem of the LFM is that it does not generate an implied volatility smile/skew curve. It gives only a flat line, which contradicts the real market data. Since the LFM has been rejected for modelling the volatility smile, Local Volatility, Stochastic Volatility (hereafter referred to as SVM) and Jump Diffusion Market Models have been investigated in the area of quantitative finance for pricing interest rate derivatives. However, it was observed in [41] that the local volatility models have a crucial error for hedging derivatives, predicting volatility smiles and skews in the other direction. Moreover, although we would like to incorporate jump diffusion in the Market Models, it often causes a loss of computational speed. Therefore the current research trend focuses on the SVM. Among the SVM, the SABR Model ([41]) proposed in 2002 is the most appreciated model in the current financial market; hence, it is regarded as the market standard model (see for example, [76]). The advantages of the SABR Model are the following:

to interest rate increase and vice versa. Accordingly, other things being equal, an increase in the proportion of long-term assets (long-term liabilities) should raise (lower) interest rate beta in Stone’s two-factor model. The estimate of each bank’s interest rate beta thus re‡ects the market’s assessment of its duration gap. The …ndings of Flannery and James have instigated even more academic in- terest in the area. Using di¤erent methodologies, data samples and time periods many works have recon…rmed or sometimes questioned Flannery and James con- clusions [e.g., Booth and O¢ cer, 1984; Scott and Peterson, 1986; Bae, 1990; Saunders and Yourougou, 1990; Madura and Zarruk, 1995; Allen and Jagtiani, 1997; Elyasiani and Mansur, 1998; Oertmann, Rendu and Zimmermann, 2000]. Numerous academic contributions have also extended the Flannery and James framework by demonstrating that the estimated interest rate betas also convey the interest rate sensitivity of …nancial institutions’ stocks unrelated to their balance sheet structure. In particular, the researchers embrace the relevance of banks’ income structure [Fraser, Madura and Weigand, 2002], o¤-balance sheet activities [Hirtle, 1997; Choi and Elyasiani, 1997], and equity capital [Au Yong, Fa¤ and Chalmers, 2009]. Other works have also acknowledged the intermedi- aries’e¤orts to hedge interest rate exposures through some of these instruments. Chapter 3 of this thesis provides a detailed overview of the literature in this area. Based on the discussion above, the interest rate beta from Stone’s model can be regarded as a by-product of a …nancial institution’s e¤orts to manage interest rate risk given its balance and o¤-balance sheet composition. Namely, this mea- sure accounts for the …rms’decision-making, planning and control regarding their balance and o¤-balance sheet positions that contribute to interest rate exposure. This interpretation of interest rate risk is endorsed throughout the thesis.

2. Feeble as the arguments for borrowing to fund public investments are, it is just possible that at some time in the future, advocates of that borrowing get their house in order and manage to demonstrate the optimum amount of such borrowing, perhaps expressed as a percentage of GDP. But having done that, central banks cannot then create fresh base money and buy up those bonds with a view to influencing interest rates because that involves in effect funding public investments with freshly created money, which is exactly the form of funding advocated in this paper!

Theoretical interest rate models, formulated in terms of stochastic differential equations, often assume continuous observations in time. The main merit of continuity is the flexibility for mathematical treatment. Among several types of mean-reverting processes, CIR model ([8]) is one of the most exploited short term rate models in literature. Accordingly, there have been considerable studies concerning the parameter estimation for the model.

GDP is a important indicator of a nation’s microeconomic situation and development (Haggart, 2000). GDP can be viewed from two kinds such as the expenditure approach and the income approach. The expenditure approach takes account of all goods and services within a specified time period. For an example, household items that we used to buy regularly, consumptions from a foreign investor and services (Andolfatto, 2005).The income approach can be termed as the level of worker's compensation, rent, interest rates, the income of a particular business, the tax of a manufactured goods and import level (McConnel and Brue, 2008).

Without developing theoretical models, Goodfriend (2000) suggested a carry tax on bank reserves as a way of overcoming the zero lower bound, and Fukao (2005) proposed a tax on government-backed finan- cial assets as a way to get the Japanese economy out of the stagnation that it has been experiencing since the 1990s. Abo-Zaid and Gar´ın (2016) showed that the optimal nominal interest rate is negative in a New Keynesian model with a borrowing constraint. Rognlie (2016) constructed a money-in-the- utility-function model where the utility of money is saturated and showed that the optimal interest rate is negative under price rigidity. Meanwhile, Eggertsson et al. (2019) argued that lowering the nominal rate of interest on bank reserves to negative values reduces commercial banks’ profits and has a contractionary effect on output. They developed a New Keynesian model with a commercial banking sector and examined the effects of a negative nominal interest rate in a short-run slump caused by a preference shock.

Indeed, much if not most of the debt incurred via credit cards is for current consumption rather than the purchase of capital investment items. Whether it’s really in anyone’s interest to incur that sort of debt is of course debatable, but there is much to be said for a system where each consumer decides what is in their own interest, and clearly many consumers think the latter “current consumption debt” is in their interests.