Interest Rates and Initial Public Offerings

Nominal interest rates may remain substantially below the averages of the last half century, because central banks' inflation objectives lie below the average level of inflation, and estimates of the real interest rate that are likely to prevail over the long run fall notably short of the average real interest rate experienced during this period. Persistently low nominal interest rates may lead to more frequent and costly episodes at the effective lower bound (ELB) on nominal interest rates. We revisit the frequency and potential costs of such episodes in a world of low interest rates, using both a dynamic stochastic general equilibrium (DSGE) model and the Federal Reserve's large-scale econometric model, the FRB/US model. Four main conclusions emerge. First, monetary policy strategies based on traditional, simple policy rules lead to poor economic performance when the equilibrium interest rate is low, with economic activity and inflation more volatile and systematically falling short of desirable levels. Moreover, the frequency and length of ELB episodes under such policy approaches are estimated to be significantly higher than in previous studies. Second, a risk adjustment to a simple rule—whereby monetary policymakers are more accommodative, on average, than prescribed by the rule—ensures that inflation averages its 2 percent objective, and requires that policymakers systematically seek inflation near 3 percent when the ELB is not binding. Third, commitment strategies, whereby monetary accommodation is not removed until either inflation or economic activity overshoots its long-run objective, are very effective in both the DSGE and FRB/US models. And fourth, our simulation results suggest that the adverse effects on economic and price stability associated with the ELB may be substantial at inflation targets near 2 percent if the equilibrium real interest rate is low and monetary policy follows a traditional approach. Whether such adverse effects could justify a higher inflation target depends upon the degree to which monetary policy strategies that differ substantially from such traditional approaches are feasible, and an assessment of a broader array of the inflation target's effects on economic welfare.

In order to realize the sustainable development of the communication industry, many banks have developed some new projects to provide loan to the mobile phone brand companies (MPBCs). This paper studies a perfect information game among three parties: telecom operator (TO), MPBC, and bank. In the first stage, the bank decides an interest rate and shows it to the TO and the competitive MPBC. In the second stage, the TO and MPBC are engaged in Cournot games: a simultaneous subgame, a TO-as-leader sequential subgame, and an MPBC-as-leader sequential subgame. The TO’s and the MPBC’s decisions and the production/sale quantities are investigated. The impacts of the interest rate and the substitute factor on the TO’s and the MPBC’s optimal decisions are analyzed. When the substitute factor is high, at a low interest rate, the total sales in the simultaneous subgame is higher than those in the other two subgames; at a high interest rate, the total sales in the MPBC-as-leader subgame is higher than those in the other two subgames. However, when the substitute factor is low, at a low enough interest rate, the total sales in the simultaneous subgame is higher than those in the other two subgames; at a high enough interest rate, the total sales in the MPBC-as-leader subgame is higher than those in the other two subgames; at a moderate interest rate, the total sales in the TO-as-leader subgame is higher than those in the other two subgames. Besides, the optimal interest rate of the bank is investigated and the impact of the substitute factor on the optimal interest rate is analyzed. The bank sets a higher interest rate in the MPBC-as-leader subgame than those in the other two subgames. Besides, when the substitute factor is low, the bank sets a lower interest rate in the TO-as-leader subgame than that in the simultaneous subgame; however, when the substitute factor is high, the bank sets a higher interest rate in the TO-as-leader subgame than that in the simultaneous subgame.

We analyze how interest rates affect cross-border portfolio investments. Data on U.S. bond holdings by foreign investors from 31 countries for the period 2003 - 2016 and a large variety in movements in interest rates in these countries provide for a unique way to analyze shifts in investment behavior in response to interest rates. We find that low(er) interest rates, now prevailing in many advanced countries, lead to greater investment in general into the United States, with the effects generally driven by investment in (higher yielding) corporate bonds, rather than in Treasury bonds. In addition to affecting overall investments, lower interest rates at home are associated with a greater weight on corporate bonds, consistent with search- for-yield. The results are economically important and robust to controlling for a number of country-specific macroeconomic and financial conditions as well as to sample restrictions and choices of interest rate. Our findings have important policy implications in that they suggest that low interest rates can lead to shifts in the volume and composition of overseas investments.

Using a unique dataset of the Euro-area and the U.S. bank lending standards, we find that low (monetary policy) short-term interest rates soften standards for household and corporate loans. This softening--especially for mortgages--is amplified by securitization activity, weak supervision for bank capital, and low monetary policy rates for an extended period. Conversely, low long-term interest rates do not soften lending standards. Finally, countries with softer lending standards before the crisis related to negative Taylor rule residuals experienced a worse economic performance afterward. These results help shed light on the origins of the crisis and have important policy implications. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Die durch die grose Finanzkrise induzierten hohen Schuldenquoten zwingen die Staaten zu Masnahmen des Schuldenabbaus. Financial Repression bietet dafur Moglichkeiten. Sie entsteht, wenn staatliche Instanzen den Finanzmarkten Masnahmen oktroyieren und manifestiert sich in erster Linie in niedrigen Realzinsen. Financial Repression wird als weiteres Charakteristikum einer „neuen Normalitat“ der Weltwirtschaft mit niedrigen Potenzialwachstumsraten und Zinssatzen sowie hohen staatlichen Schuldenstanden angesehen. Der Beitrag stellt dieses Charakteristikum vor und beurteilt seine empirische Relevanz.

PurposeWhat causes the downward trend of real interest rates in major developed economies since the 1980s? What are the challenges of the near-zero interest and inflation rates for monetary policy? What can the policymakers learn from the latest developments in the monetary and interest rate theory? This paper aims to answer these questions by reviewing both basic principles of interest rate determination and recent academic and policy debates.Design/methodology/approachThe paper critically reviews the explanations for the downward trend of real interest rates in recent decades and monetary policy options in a near-zero interest rate environment.FindingsThe decline of real interest rates is likely an outcome of multiple technological, social and economic factors including diminished productivity growth, changing demographics, elevated tail-risk concerns, time-varying convenience yields of safe assets, increased global demand for safe assets, rising wealth and income inequality, falling relative price of capital, accommodative monetary policies, and changes in industry structure that alter the investment and saving behaviors of the corporate sector. The near-zero interest rate limits the space of central banks' response to economic crises. It also challenges some conventional wisdoms of monetary theory and sparks radically new ideas about monetary policy.Originality/valueThis survey differs from the existing work by taking a broader view of both economics and finance literature. It critically assesses the economic forces driving the global decline of real interest rates through the lens of basic principles and empirical evidence and discusses the merits and limitations of each proposed explanation. The study emphasizes the importance of a better understanding of economic forces driving diverging trends of corporate investment and saving behaviors. It also discusses the implications of the neo-Fisherism and the fiscal theory of price level for monetary policy in a low interest rate environment.

The Austerity Paradox: I See Austerity Everywhere, But Not in the Statistics

Following world wide trends, closer integration of agriculture into the macroeconomy has exposed farmers to the effects of changes in interest rates, exchange rates and prices that are associated with changes in monetary policy. In South Africa, farmers are faced with persistently high innation, nuctuating interest rates and declining rand exchange rate. A general equilibrium simultaneous equation model was constructed to analyse the impacts of monetary policy on South African agriculture. Annual data (1960-1987) were used to estimate equations representing the field crop, horticultural, livestock and manufacturing sectors, and the money and foreign exchange markets. The interest, innation, and exchange rates were determined endogenously and key macrolinkages whereby the impacts of monetary policy are transmitted to agriculture were simulated. Due to insufficient degrees of freedom, the model was estimated by two-stage principal components. The estimated model was used to simulate the dynamic impacts of an expansionary monetary policy on agriculture. In the short run. this causes the real interest rate to fall, exchange rate lo depreciate, and general level of prices to rise. Depreciation of the exd1ange rate and higher domestic innation raise input prices. Increased cost effects of higher input prices outweigh the reduced cost effects of lower real interest rates causing real field crop and horticultural supply to decrease. Increased stock effects of lower real interest rates and increased cost effects of higher input costs impact negatively on livestock supply. The resultant decrease in agricultural supply causes commodity prices to rise which lowers real demand for agricultural products. The net effect is a decline in real agricultural income for the sectors modeled.

Are Extremely Low Interest Rates Really Caused by Insufficient Growth and Inflation Rather than by ECB Policy? An Examination of ECB's Defense Against German Critiques

RESUMO Este artigo pretende discutir criticamente a proposta de Persio Arida de adotar conversibilidade monetária no Brasil. Arida (2003a, 2003b, 2004) aponta que a conversibilidade da moeda resultaria em taxas de juros internas mais baixas no Brasil, assim como taxas de juros mais baixas para os bônus externos brasileiros. Além disso, a conversibilidade da moeda estabilizaria os fluxos de capital, bem como a volatilidade da taxa de câmbio no Brasil. Argumentamos neste artigo que essa proposta não leva necessariamente a uma menor volatilidade da taxa de câmbio ou a taxas de juros mais baixas. Além disso, fechamos o documento apresentando algumas alternativas em termos de controles de capital no Brasil.

Using anti-corruption efforts as a natural experiment, we analyzes the effects and welfare consequences of political connection, with detailed data set of political connection and individual bank-loan contracts for listed companies in China from 2008 to 2014. We find that politically connected firms, on average, pay significantly lower loan interest rate, and firms would receive even lower interest rate if at least one of its top officers has or had served in government, or if their political connections are built by CEO or chairman of board, proves that political benefits exists in credit market. Our result also support that although both signaling and rent-seeking mechanism work in this process, rent-seeking effect plays a dominate role in China, specifically regional anti-corruption efforts and the recent anti-corruption campaign both reduce the favor of political connections in credit market.

This research examines potential asymmetric interactions between interest rate changes and sector returns in the US, focusing on some of the major economic and geopolitical events over recent years, such as the COVID-19 pandemic and the Russia–Ukraine conflict. These events have triggered political and economic responses that have deeply affected financial markets. Using the Nonlinear Autoregressive Distributed Lag (NARDL) methodology, the study focuses on 11 sector indices of the S&P 500. It also decomposes nominal interest rates into their real interest rate and inflation expectation components. The analysis covers the period from April 7, 2019 to April 28, 2024, dividing the sample into two distinct sub-periods characterized by declining and rising interest rates, respectively, for robustness purposes. The results reveal several key findings. First, the sensitivity of sector returns is sector-, model- and period-dependent. Second, disaggregating nominal interest rates into inflation expectations and real interest rates significantly improves the analysis of US stock market dynamics at the sector level. Inflation expectations are found to be positively correlated with sector returns, whereas real interest rates tend to have a negative effect. Third, short-term asymmetries in shifts in interest rates and inflation expectations have a significant impact on the US stock market. Finally, the explanatory power of the model is significantly stronger in the first sub-period, which is characterized by declining and low interest rates and the economic impact of the COVID-19 crisis. These results have important implications for portfolio managers and other financial market participants.

Could 'it' happen here?Australia survived the global financial crisis relatively unscathed, despite much higher interest rates than in other developed countries (see Figure 1). But our exceptional status may be short-lived. In May 2015, the cash rate was cut to 2 per cent, the lowest level since the current series began in 1990, and by some measures the lowest short-term rate since at least 1960. Nevertheless, unemployment has risen steadily, despite the fact that investment in the resources sector has yet to fall back to normal levels.It would seem prudent, then, to be prepared for interest rates to approach zero, as has already occurred in most other OECD countries.2 Sheehan and Gregory (2013) and Freebairn and Corden (2013) have called for increased infrastructure spending on this basis. Yet, as these authors acknowledge, such a policy faces considerable challenges. Furthermore, if warnings of 'secular stagnation' have any validity, near-zero interest rates may not be a once-in-a-generation emergency to be dealt with using ad hoc expedients, but an increasingly common situation requiring a more systematic response. In this case, changes to monetary policy would appear more desirable.This paper considers various means by which monetary policy may stimulate aggregate demand when its usual instrument - the short-term interest rate - is unavailable. The objectives of monetary policy are taken here to be the conventional ones of a stable value of money and full employment, analysed under the broadly 'Keynesian' assumption that fluctuations in nominal spending have significant effects on real output. Financial stability objectives are assumed to be dealt with separately via (macro)prudential regulation.3The paper begins by describing the problem of the zero lower bound, and the logic of expectations management in general and level targeting in particular as a solution. It then argues, however, that level targeting requires a more careful choice of target variable than the current regime of inflation targeting, and that the price level, nominal GDP and nominal wages all appear problematic. A more eclectic mix of policies is then considered.The zero lower bound, and the vital role of expectationsAs long as money can be stored at negligible cost, interest rates cannot fall below zero, because hoarding money would then be a superior alternative to lending it. This poses a problem for conventional monetary policy, under which the usual response to falling inflation or rising unemployment is a lower interest rate. What happens if the interest rate cannot be cut any further? The experience of Japan in the 1990s, and much of the world since 2008, shows that near-zero interest rates are perfectly compatible with low and falling inflation, high and rising unemployment, and output well below previous estimates of potential.Can monetary policy still be effective in such a situation? Theory suggests that expectations management is the key. In the standard permanent income or life-cycle model, current spending is determined by expected future income and interest rates. If promises about future policy are successful in changing these expectations, they may increase demand without any immediate change in the central bank's balance sheet. Conversely, even a very large balance sheet expansion may be ineffective if it is believed to be temporary and thus does not change expectations.4 Krugman (1998), motivated by the then unusual experience of Japan, showed that, while a temporary monetary expansion would fail to raise prices and output at the zero lower bound (since it cannot change the current interest rate, and, being temporary, will not affect any future variables), a credible permanent expansion could work, by increasing the expected future price level and therefore reducing the real interest rate. (This assumes that a permanently higher money supply must eventually create proportionally higher prices at some point in the future when the interest rate rises above zero. …

Life insurers, whose contractual liabilities include providing minimum guaranteed interest rates to policyholders, are significantly affected by persistently low interest rates. Hence, this study reviews the literature on the prolonged low interest rate environment and its impact on the life insurance industry, incorporating multiple perspectives and practices in different countries. The effect of low interest rates on life insurance products depends on the sensitivity of the interest rate of each product type and the level of minimum interest rate guarantee. In addition, their impacts on the valuation of life insurance companies depend on shifts in the valuation interest rate, which is used to discount the present value of future benefits, as well as the financial and solvency issues faced by insurers. Overall, the literature suggests that insurers need both short- and long-term solutions to respond to a prolonged low interest rate environment.

An oil demand and supply model incorporating monetary policy