Dynamics of Money Market Interest Rates in Ghana: Time-Frequency Analysis of Volatility Spillovers

As the second longest practicing inflation targeting economy in Africa, it is of interest to investigate the degree to which policy interest rate influences other money market rates so as to gauge the overall effectiveness of monetary policy transmission in Ghana. This study evaluates the degree of connectedness among money market rates and also determines the most dominant money market rate(s) in Ghana. The basic finding is that the monetary policy rate has a low-to-moderate influence on volatility dynamics of other money market rates in Ghana across historical time-interval and time-frequency domains. This is a reflection of a generally weak capability of policy interest rate to drive other market rates in Ghana. Both monetary policy rate and Treasury bill rate are net transmitters of shocks, while interbank, lending and saving rates are net receivers of shocks in the money market. However, the Treasury bill emerges as the largest shock transmitter in the money market, across all forecast horizons and analytical domains. The lending rate is the largest shock recipient in the money market, largely from the Treasury bill rate which suggests ample evidence of fiscal dominance in Ghana. The study accentuates the exigency for monetary and fiscal policies to expeditiously address the domestic structural bottlenecks, especially in the financial sector and the fragile fiscal profile, in order to strengthen policy transmission in Ghana.     

For the Motion

The interest rate is one of the most important factors in farmers’ decision-making of borrowing and lending in the informal financial market in China. This paper explores the determinants of the interest rate with microfinance data. Results show that the income disparity, the relationship between borrowers and lenders, the usage of borrowing, and formal credit constraints are important factors affecting interest rates. More importantly, to borrow from those in the higher income hierarchy, farmers have to bear higher interest rates. We attribute this to different social capitals across income groups and higher default risks for the poor. This paper contributes to a better understanding of the informal financial market in rural China and sheds light on the mechanism of higher informal interest rate formation.     

An empirical analysis of the factors determining the financial crisis in Asia

This article tests a hypothesis that the causes of the Asian financial crisis are weaknesses in the balance sheet of financial institutions, high international interest rates, high short-term external debts, excessive loans, and continuing large current account deficits. It also tests a hypothesis regarding the determination of nonperforming bank loans. Empirical tests are carried out with panel data on seven countries in Asia—Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand—for the 1995 through 1997 period. The 3-month LIBOR interest rate and nonperforming loan rates of banks are found to be the major determinants of the Asian financial crisis. The nonperforming bank loan ratios are explained by the corporate leverage ratio. In addition, both the corporate high leverage ratio and LIBOR interest rates are found to significantly affect the outcome of the Asian crisis. Lowering world interest rates and taking the measures of individual Asian countries to reduce nonperforming assets and debt-to-equity ratios would be very effective in preventing reoccurrence of the crisis.     

Saving,investment, growth and the cost of financial repression

This paper presents a quantitative estimate of the cost of financial repression in developing countries. Here, financial repression is interpreted as the technique of holding institutional interest rates (particularly deposit rates of interest) below their market equilibrium levels. For a sample of developing countries, saving is found to be affected positively by the real deposit rate of interest, as is real money demand, where money is defined broadly to include savings and time deposits. Under disequilibrium interest rate conditions, higher saving which raises real money demand increases pari passu the real supply of credit. Credit availability is an important determinant not only of new investment but also of capacity utilization of the entire capital stock. Hence, the growth rate is itself affected positively by the real deposit rate of interest through two channels – first, the volume of saving and investment and, second, capacity utilization of the entire capital stock, i.e. the measured incremental capital/output ratio. Estimates of saving and growth functions lead to the conclusion that the cost of financial repression appears to be around half a percetage point in economic growth foregone for every one percentage point by which the real deposit rate of interest is set below its market equilibrium rate.     

The evolution of commercial banking and financial markets in Taiwan

Over the past five decades, Taiwan has achieved rapid economic development. Correspondingly, Taiwan’s financial system has been gradually transformed from a controlled system into a liberalized one, from a state banking system into a private banking one, and from an inward investment system into an outward investment one. In the financial market, the interest rate and foreign exchange rate have always been completely determined by market forces. As for capital movements, there are no controls on trade-related capital transactions. Only inward investment in stock markets is still subject to a ceiling imposed by the Central Bank. Financial institutions are gradually being liberalized, although the process is rather slow. Many private banks have been established since 1991, creating a competitive situation in the banking sector. Since the financial crisis broke out in East Asia, Taiwan has suffered less from its impact because its economic fundamentals are comparatively sound. However, it will still take a considerable amount of time before Taiwan’s financial system is fully liberalized.     

Hot Money Flows,Commodity Price Cycles and Financial Repression in the USA and China： The Consequences of Near-zero US Interest Rates

Under near-zero US interest rates, the international dollar standard malfunctions. Emerging markets with naturally higher interest rates are swamped with hot money inflows. Emerging market central banks intervene to prevent their currencies from rising precipitately. They lose monetary control and domestic prices begin inflating. Primary commodity prices rise worldwide unless interrupted by an international banking crisis＇. This cyclical inflation on the dollar＇s periphery only registers in the US core eonsumer price index with a long lag. The zero interest rate policy also fails to stimulate the US economy as domestic finaneial intermediation by banks and money market mutual funds is repressed. Because China is forced to keep its interest rates below market-clearing levels, it also suffers from finaneial repression, although in a form differing from that in the USA.     

Completing China's Interest Rate Liberalization

China's recent removal of the last ceiling restriction on deposit rates in October 2015 is a milestone in interest rate liberalization, but not the end of it. International experience suggests that, without structural and quantitative reforms, simply freeing interest rates can result in major financial stress. Before China's central bank can completely relinquish implicit or explicit guidance for commercial banks' interest rate determination, it needs to accomplish two tasks: improvement of commercial banks' pricing capability as well as the monetary policy transmission mechanism. Both tasks require significant reform measures to be initiated, such as enforcing market discipline, forming a new monetary policy framework, developing money and capital markets, abandoning quantitative restrictions on credit and reforming the financial regulatory system.     

Strong sterling pound and weak European currencies in the crises: Evidence from covered interest parity of secured rates

In the post Lehman period, the interest rate of the US dollar became low on the forward contract because of“flight to quality” to the international currency. However, in the Euro crisis, that of the Sterling pound became equally low, while the other European currencies such as the Danish kroner increased its their interest rate. By using secured rates, the following analysis examines why the Sterling pound and the Danish kroner showed asymmetric features in deviations from the covered interest parity (CIP) condition. The regression results suggest that there was a structural break in the determinants of the deviations across the European currencies in the two crises. Currency-specific money market risk was critical in explaining the deviations in the global financial crisis (GFC), while EU bank credit risk and global market risk were useful in explaining the deviations in the Euro crisis. In particular, EU bank credit risk and global market risk had asymmetric effect on the deviations. The asymmetry explains contrasted features between the Sterling pound and the Danish kroner.     

Competitive Conditions in the Tanzanian Commercial Banking Industry

Abstract: Since 1991, Tanzania has made important improvements in reforming its financial sector, dismantling the state‐dominated banking sector and allowing foreign bank entry. Despite this, the banking industry is still concentrated with low accessibility to financial services. Large foreign banks dominate the financial landscape, preventing competitive dynamism to permeate the sector. This paper analyses the competitive nature of the Tanzanian banking industry from 2004 to 2008. Utilizing a rich bank level data set, we employ the Panzar–Rosse methodology to compute the competitive index, taking into account risk, efficiency, regulatory and macroeconomic factors. The results show that banks in Tanzania earned their income under conditions of oligopolistic conduct. Moreover, the competitive index derived from an interest revenue equation was not significantly different from that obtained using an aggregate revenue measure. This suggests that the degree of contestability from traditional intermediation activities approximates overall bank behaviour. The overall message is that greater market contestability can be achieved by adopting measures aimed at stimulating competitiveness in the banking sector, including consolidating gains on the macroeconomic front and allowing more foreign bank entry so as to increase the spread of banking services.     

Dual-track interest rates and the conduct of monetary policy in China

China has a dual-track interest-rate system: bank deposit and lending rates are regulated while money and bond rates are market-determined. The central bank also imposes an indicative target, which may not be binding at all times, for total credit in the banking system. We develop and calibrate a theoretical model to illustrate the conduct of monetary policy within the framework of dual-track interest rates and a juxtaposition of price- and quantity-based policy instruments. We show the transmission of monetary policy instruments to market interest rates, which, together with the indicative credit target in the banking system, ultimately are the means by which monetary policy affects the real economy. The model shows that market interest rates are most sensitive to changes in the benchmark deposit interest rates, significantly responsive to changes in the reserve requirements, but not particularly reactive to open market operations. These theoretical results are verified and supported by both linear and GARCH models using daily money and bond market data. Overall, the findings of this study help us to understand why the central bank conducts monetary policy in China the way it does, using a combination of price and quantitative instruments with differing degrees of potency in terms of their influence on the cost of credit.     

Dual-track interest rates and capital misallocation

The control-track interest rate and the market-track interest rate constitute China's dual-track interest rates. A theoretical model of dual-track interest rates and financial frictions is studied. In the model, bank loans are provided to state-owned enterprises with the control-track interest rate, private enterprises resort to shadow banking with the market-track interest rate. The interest rate wedge between these two interest rates distorts capital allocation, even driving a sector out of production. Full interest rate liberalization which eliminates the interest rate wedge alleviates cross-sector capital misallocation. However, the net effect on aggregate TFP is ambiguous due to the within-sector effect. Under calibrated parameters, full interest rate liberalization improves aggregate TFP moderately, unless the financial reform aimed to have SOEs and POEs face the same degree of financial frictions is also implemented.     

Policy rate pass-through and the adjustment of retail interest rates: Empirical evidence from Malaysian financial institutions

The paper examines the interest rate pass-through from money market rates to various retail rates in Malaysia within the framework of an error-correction model. We estimate the short- and long-run interest rate pass-through and analyse the asymmetric behaviour of financial institutions under different monetary regimes. The results show that both deposit and lending rate pass-throughs are incomplete. However, pass-through and speed of adjustment vary across financial institutions and retail rates. This analysis also shows that interest rate adjustments are asymmetric, with more significant adjustments taking place under monetary easing than under monetary tightening. These results provide support for the existence of the interest rate channel of monetary policy in Malaysia. There is thus a need to conduct effective monetary operations to support efficient monetary transmission in Malaysia.     

Analysing disequilibrium interest-rate systems in developing countries

Under equilibrium conditions, monetary policy measures to raise institutional interest rates are contractionary. When interest rates are held below their free-market equilibrium levels, however, an increase can be expansionary. Higher institutional interest rates may deter savings in the form of unproductive inflation hedges and encourage savings in the form of financial claims issued to finance productive investment. In most developing countries, money is the predominant financial repository of savings and bank loans are a major source of investible funds. Hence, attention is focused here on models which analyse the effects of binding interest-rate ceilings on financial intermediation. Empirical evidence reported in this paper is consistent with the view that binding institutional interest-rate ceilings can have a substantial growth-reducing impact.     

Keynes' monetary theory and bank reserves in Britain

Conclusions The key institutional peculiarity of Britain that caused the economics of Keynes is that bank reserves on all types of deposits were traditionally the same. This meant that decisions of savers and speculators to increase holdings of Savings-deposits (which are the alternative to securities) did not increase bank lending ability. The key mechanism of flexible interest rates was disabled, and arbitrage between different types of investments caused the fixing of the bank rate and the deposit rate to be transmitted to all short-term rates, and with inelastic expectations, to long rates. Higher interest rates increase the quantity of the medium of exchange in circulation. The quantity of the medium of exchange is endogenous in Keynes' system. Such interest-rate raising events as decreased savings, an increase in the marginal efficiency of capital, and deficit financing all increase the quantity of the medium of exchange in circulation. The monetarist distinction between deficit financing by money creation and debt is not meaningful in Britain where all deficit financing expands the money supply.     

Interest Rate Pass‐Through in Mongolia

This study empirically examines the interest rate pass‐through of the money market interest rate to bank lending and bank deposit interest rates in Mongolia using both linear and nonlinear autoregressive distributed lag (ARDL) models. The results from the empirical analysis using data from December 2002 to September 2015 suggest that interest rate pass‐through is generally weaker, slower, and asymmetric in Mongolia. The new findings provide evidence that: (i) interest rate pass‐through has improved over time; (ii) the bank deposit rate has a higher long‐run interest rate pass‐through and slower adjustment than the bank lending rate; and (iii) there is a negative long‐run asymmetric pass‐through with respect to the bank lending rate and a positive long‐run asymmetric pass‐through with respect to the bank deposit rate.     

货币政策对中国股市影响的统计分析——基于独立样本t检验的实证研究

本文应用独立样本t检验,分析了2004年以来的央行4次加息对中国股市的短期影响效应,结合协整方法实证检验了货币政策对中国股市的长期影响效应。研究结果表明,短期内中国股市对加息具有一定的敏感度和滞后性,长期而言,利率与股指呈现负相关,而货币供应量与股指之间的关系自2004年以来发生明显改变,由以前的负相关转变为2004年以后的正相关。     

A Descriptive Model of Banking and Aggregate Demand

We integrate a banking sector into an accessible macroeconomic framework, which then provides new insights on developments around the Global Financial Crisis. The analysis shows that growth of banking sector money supply may help explain the secular decline in long-term interest rates before the crisis. A new bank funding channel of monetary transmission clarifies why increases in central bank policy rates could not reverse this trend. Our analysis highlights the distinction between the zero lower bound and the liquidity trap, and shows that bank recapitalizations can be more effective than fiscal expansions in restoring aggregate demand after a banking crisis.     

Estimates of the fisher effect: A neo-Keynesian approach

Conclusion This paper has presented estimates of a structural model designed to study the processes by which inflationary expectations affect nominal interest rates. The theoretical framework expands upon previous analyses of the effects of expected inflation primarily by analyzing a wider range of resulting substitution effects both among financial assets as a group, and between financial assets and commodities. A possible substitution effect between leisure and both these groupings (commodities and financial assets) was also considered. The empirical work differs from previous studies in that we estimate the effects of inflationary expectations on nominal interest rates within the structure of a complete macroeconomic system rather than using the single-equation approach outlined in section II above. The results provide evidence on the magnitude of the Fisher effect and the market mechanisms which comprise this effect as estimated within the neo-Keynesian system. These market mechanisms were found to consist of direct effects in the long-term bond market and on the aggregate demand for and supply of commodities. The total adjustment consists of changes in all the endogenous variables with the final outcome being an increase in each of the nominal interest rates in the model. The implied increase in nominal interest rates is less than a full-adjustment to the increase in the expected inflation rate, thus for the time period considered here, the estimates imply a fall in the real rate of interest. Prices and nominal income were also found to vary positively with the expected inflation rate. The authors wish to thank an unknown referee of this journal for helpful comments.     

Why floating exchange rates fall: A reconsideration of the liquidity trap

In the international capital market, interest rates would seem to be natural shock absorbers for balancing currency risk associated with expected inflation or differential taxation. Under a floating exchange rate, however, short-term interest rates in each national money market behave as if caught in a liquidity trap. The problem arises because the domains for national monetary circulation remain somewhat disjoint even though the bond market is fully integrated internationally. The national rate of interest is ncapable of equilibriating the domestic money market on the one hand and the international bond market on the other. The result is excessively high exchange-rate volatility that distorts the flow of international commodity trade and causes cycles of inflation and deflation in open economies.     

Bailout Clauses and the Price of Credit: The Dutch Experience for Housing Corporations

The bulk of capital provided to Dutch housing corporations is explicitly guaranteed by a bailout clause. Using a dataset with loans provided by the largest Dutch public sector bank (BNG Bank), we find substantial evidence that this bailout clause has reduced interest rates by about 72 basis points. The annual benefits of reduced interest costs outweigh the costs of default. We also find that the interest rates for guaranteed loans are insensitive to the financial position of corporations. We therefore surmise that the bank relied on the bailout clause. Finally, the bailout clause for corporations (which guarantees individual loans) and the one for municipalities (which entirely protects municipalities from defaulting) lead to a similar reduction in interest.