INFLATION TARGETING AND THE FISHER EFFECT IN SOUTH AFRICA: AN EMPIRICAL INVESTIGATION

The paper analyses the relationship between expected inflation and nominal interest rates during a period of inflation targeting in South Africa, i.e. from 2000 to 2005. Specifically, it investigates the Fisher hypothesis that nominal interest rates move one‐to‐one with expected inflation, leaving the real interest rate unaffected. The analysis distinguishes between a short‐run Fisher effect and a long‐run Fisher effect. Using cointegration and error correction models (for monthly data for the period April 2000 to July 2005), it was found that the short‐run Fisher hypothesis did not hold during the relevant period under the inflation targeting monetary policy framework in South Africa. This is attributed to a combination of the South African Reserve Bank's (SARB) control over short‐term interest rates and the effects of the monetary transmission mechanism. The long‐run Fisher hypothesis could not be confirmed in its strictest form: while changes in inflation expectations move in the same direction as the nominal long‐term interest rate. This suggests that monetary policy has an influence on the real long‐term interest rate, which has positive implications for general economic activity, thus confirming the credibility of the inflation targeting framework.     

NO‐ARBITRAGE ONE‐FACTOR MODELS OF THE SOUTH AFRICAN TERM STRUCTURE OF INTEREST RATES

Short‐term interest rate processes determine the term structure of interest rates in an arbitrage‐free market and are central to the valuation of interest rate derivatives. We obtain parameter estimates and compare the empirical fit of alternative one‐factor continuous‐time processes for the South African short‐term interest rate (and hence of arbitrage‐free term structure models) using Gaussian estimation methods. We find support only for diffusions where the interest rate volatility is moderately sensitive to the level of the interest rate. Other common models with restrictions that either preclude this effect, or restrict it to be too high, do not fit the data. Differences in the specification of the drift function have no evident effect on model performance.     

Structural breaks and the expectations hypothesis of the term structure: evidence from Central European countries

The expectations hypothesis of the term structure of interest rates in the Czech Republic, Hungary, Poland and Slovakia, which joined the EU on May 2004, is investigated in this paper. Using VAR and cointegration techniques in the presence of structural breaks, I examine several testable implications of the theory: (i) cointegration of interest rates, (ii) spread stationarity, (iii) validity of the cross-equation restrictions implied by the theory and (iv) no excess volatility of the actual spread relative to the theoretical spread. The results support the expectations hypothesis for the Czech Republic and Hungary and reject it for Poland and Slovakia.     

Forecasting French and German long-term rates using a rational expectations model

Forecasting French and German Long-Term Rates Using a Rational Expectations Model. — In this paper, the authors study a forecasting model for long-term rates based on the expectations hypothesis of the term structure. The long-term rate is expressed as an average of expected short-term rates, which are modelled using three models: two univariate models (with stationary and nonstationary rates) and one model in which the short-term rate terminal boundary is specified as a function of agents’ expectations. These approaches are used to forecast French and German long-term rates from 1960 to 1996. The authors find that the model based on agents’ expectations gives the best forecasts, especially for short horizons.     

Monetary policy and the yield curve at zero interest

In contrast to affine term structure models, Black’s (1995) model of interest rates as options has properties suitable to examine the yield curve when the short-term interest rate is near zero. We estimate a Black’s model with Japan’s data to extract market expectations about duration of zero interest. We find that expectations about duration have substantially varied, which contradicts with the assumption utilized in the literature. We also find a tight link between expectations about duration and survey measures of inflation expectations, which appears to be attributable to the Bank of Japan’s commitment conditional on inflation.     

A Note on Deficit,Implicit Debt,and Interest Rates

This short note revisits the long-standing issue of the relationship between government borrowings and interest rates using vector autoregression (VAR) models. In particular, we consider the dynamic impacts of both official deficit and implicit debt on the interest rates. Two measures of unfunded Social Security obligations (implicit debt) are examined. The recently developed generalized forecast error variance decompositions, which are invariant to the ordering of variables in VARs, are adopted. We find that temporary shocks to the official deficit do not cause real interest rate changes in the short term but do cause moderate changes in the long term. They have significant impact on nominal interest rates in both short and long horizons. The implicit debt also appears to have some moderate influence on real interest rates at long horizons.     

The Term Structure of Interest Rates in a Small Open Economy: A Stochastic Analysis

This article employs a rational expectations IS-LM model with price adjustment to study the effect of domestic monetary and fiscal policy and world interest rate disturbances on the real and nominal small open economy term structure of interest rates. The impact of both temporary and permanent shocks are investigated. Notable results include the fact that monetary expansions lead to positive yield curves, while the implications of fiscal expansions and increases in the world interest rate depend crucially on the duration of the shock.     

A Note on the (Continued) Ability of the Yield Curve to Forecast Economic Downturns in South Africa

In 2002‐2003, the South African yield spread falsely signalled a downswing that never materialised. This paper provides two reasons for this false signal. First, while the Reserve Bank never actually officially declared the start of a downswing, by alternative measures a downswing did actually occur. It is this severe weakness in economic activity at that time that the yield curve pointed to. Second, short‐term interest rates in 2003 were higher than they should have been because of a mistake made in measuring consumer price inflation. Because South Africa had recently introduced an inflation‐targeting regime, policy interest rates were, as a result of this error, kept too high for too long. This policy mistake was rectified as soon as the error in the Consumer Price Index was discovered. Thus, the yield curve in 2003 pointed to the reality that short‐term interest rates were too high and risked pushing the economy into full blown recession. This is demonstrated by the fact that it was a fall in long bond interest rates that caused the yield spread to turn negative, indicating expectations that short‐term interest rates would need to be cut – as indeed they were.     

Policy commitment and market expectations: Lessons learned from survey based evidence under Japan's quantitative easing policy

The Bank of Japan conducted its quantitative easing policy (QEP) from 2001 to 2006, with the policy commitment to maintaining its QEP until the CPI inflation rate became stably zero or higher. We evaluate its effects by using individual survey data on inflation expectations as well as interest rate expectations. Our analysis reveals a kinked relationship between interest rate expectations and inflation rate expectations at around the 0% threshold level of inflation expectations, in tune with this policy commitment. In addition, we evaluate the effects of the policy commitment on market expectations for the future path of short-term interest rates after the termination of the QEP. We find that, even when inflation expectations exceeded the threshold, interest rate expectations responded only gradually to inflation rate expectations.     

The term structure of Japanese interest rates:: The equilibrium spread with asymmetric dynamics

This paper examines the dynamic adjustment to long-run relationship between Japanese interest rates of different maturities. We employ a new estimation methodology that permits threshold and the momentum-threshold adjustment towards equilibrium. The results support the expectations hypothesis of the term structure of interest rate using Japanese interest rates. As in the case of the United States, it shown that the error-correction process is best estimated as asymmetric. J. Japanese Int. Economies 18 (1) (2004) 84–98.     

中国市场短期利率动态研究-基于有效矩方法的实证分析

本文以上海证券交易所国债回购市场的7天期回购利率为分析对象,选择从2000年1月4日到2005年12月13日的每日数据为样本,采用有效矩估计对三个在国外文献中流行的利率模型:CKLS模型、SV2模型、SV3模型进行实证分析.结果表明单因子CKLS模型不能很好的刻画我国短期利率的动态特征,SV2模型和SV3模型则可以较好的描述短期利率的动态变化过程.同时,受制于利率市场化问题,我国短期利率的水平效应较之于美国弱很多.     

International parity relationships between the USA and Japan

Based on multivariate cointegration analysis we show that key parity conditions between the USA and Japan do not hold as stationary relations and that this is related to the nonstationarity of the real exchange rate. The latter seems almost exclusively to be related to similar nonstationary movements in interest rates. We obtain strong empirical results suggesting a reversal of the standard linkages, as predicted by the term structure of interest rates and the Fisher condition, between short and long interest rates and interest rates and inflation. Our findings may be important for the conduct of monetary policy, which is usually thought to be transmitted through short-term interest rates. Altogether, the empirical results suggest that it is agents’ behavior in the foreign exchange market, rather than in the goods market, which is crucial for the determination of the exchange rate.     

Direct Inflation Targeting and Nominal Convergence: The Czech Case

This study analyses the impact of direct inflation targeting (DIT) on monetary policy credibility in the Czech Republic, as evidenced by asset prices. It examines the effect of changes in the two-week repo rate (the official interest rate) on short and long–term market interest rates. It assumes the asymmetry of information and the existence of a stationary stochastic equilibrium with full knowledge of authorities reaction function. We find that at short maturities, the coefficients for changes in the official repo rate are lower in the DIT period than in the pre-crisis period. This implies that the hypothesis of no increase in the transparency of monetary policy with the introduction of DIT can be rejected. We find that bond yields and interest rate swap rates with maturities of 5 years and longer did not react significantly to official interest rate decisions in the DIT period. This is consistent with the hypothesis that monetary policy was credible both before and after introduction of DIT.     

Causes of Inflation in China： Inflation Expectations

This paper argues that the main causes of inflation in China since the early 21st century are changes in the public's inflation expectations. The conventional wisdom, the quantity theory of money, may not be adequate to capture the relationship between price changes and money supply growth, as the economic system evolves and people's income and wealth grow. An examination of China's GDP deflator and broad money supply relative to nominal GDP shows that the relationship between the two series is relatively weak. A further examination of China's monthly CPI series over the period 2001–2010 reveals that the autoregressive models are a better fit than the moving average models, which suggests that the role of CPI expectations has been significant and important. Because of the importance of inflation expectations in CPI movement, we believe the Central Bank's monetary policy that targets CPI inflation should emphasize the use of policy instruments that have direct and strong communication links with the public. Quantitative measures would have their own use, but their effectiveness would be unlikely to match that of interest rate measures, especially from a short‐term perspective.     

Interest Rate Pass-through in a Dual-track System： Evidence from China

Using the Phillips-Loretan approach, this paper verifies the degree and speed of pass- through and rigidity of different interest rates in China, as well as the response of private loan interest rates to other interest rates during 2002-2012. The results indicate that the long-term pass-through from the interbank offered rates and deposit and loan interest rates to the treasury bond rate is incomplete, but that the long-term pass-through to private loan interest rates is overshooting. The long-term pass-through from the deposit and loan interest rates to the overnight interbank offered rate is incomplete, while that to the interbank offered rates of other maturities is complete. The short-term passthrough and adjustment speed of interest rates exhibit asymmetry. Therefore, before considering a full liberalization of interest rates, it is important to further enhance the competition of the financial system and the function of different interest rate systems, such as the interhank market and bond market.     

The Term Structure as a Predictor of Real Activity and Inflation in the Euro Area: A Reassessment

We study the informational content of the term structure of interest rates on future developments in inflation and real activity for the euro area, explicitly taking into account the possibility of a time-varying risk premium. We put forward a simple adjustment procedure for the term premium based on the rational expectations hypothesis of the term structure and provide evidence that the predictive content of term spreads for future developments in industrial production improves significantly if the adjusted term spread is used. The adjustment also achieves some (less systematic) improvements in the forecasting abilities of the term spread for headline inflation and core inflation. JEL no. E43, E44, E47     

Réactions du Marché d’Actions aux Chocs sur les Taux d’Intérêt de Court Terme,le Cas d’un Marché Emergent: la Bourse Régionale des Valeurs Mobilières (BRVM)

Abstract: Macroeconomics in general and interest rate policy in particular are believed, from a theoretical point of view, to act on stock market movements. This paper discusses this issue in the case of the West African stock market by studying the Regional Securities Exchange (la Bourse Régionale des Valeurs Mobilières (BRVM)) stock market reactions to interest rates innovations. Our results, based on VAR analysis, show that the BRVM stock market does not react immediately to short‐run interest rates’ innovations. Nevertheless, backed reactions occur in imminent periods: at the earliest in the second period and at the latest in the sixth period according to VAR models used. Long‐term effects of short‐term interest rates’ innovations on stock prices returns depend on models specified, on the kind of interest rate and on data frequency. Thus, the long‐term effect of central bank rent rates’ innovations is relatively more important than the one related to interbank rate's innovations. The previous situation of the market is, however, the main determinant of the change of stock prices. Our results show also that stock prices and short‐run interest rates have a similar reaction to both exchange rate and inflation rate's innovations.     

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.     

Japan’s quantitative monetary easing policy: Effect on the level and volatility of yield spreads

We examine the effects on the level and volatility of yield spreads of the Quantitative Monetary Easing Policy (QMEP) of the Bank of Japan (BoJ) implemented from March 19, 2001 to March 9, 2006. We adopt an Exponential Generalized Autoregressive Conditional Heteroskedasticity (EGARCH) model to analyze daily data for the five year duration of QMEP. The purpose of QMEP was to reduce short-term interest rate expectations with the goal of bringing down long term interest rates to stimulate the economy. Under QMEP, the operational target of monetary policy was taken as the current account balances (CABs) of financial institutions held at the BoJ. In support of QMEP effectiveness, we find that the policy to raise CABs was indeed associated with a decrease in yield spreads across all maturities. At the same time, the policy may have increased the volatility of yield spreads at short and medium time horizons, perhaps due to unevern demand for government security issues that nevertheless left confidence in the future of low interest rates intact. Preserving liquidity at or above the CABs target range was found to decrease yield spreads.     

THE BEHAVIOUR OF CERTIFICATE OF DEPOSIT RATES IN THE UK

Using a number of maturities of up to one year and weekly highquality data on UK, CD rates, 1975–92, we provide a varietyof tests of the expectations hypothesis (EH) of the term structure.Our results appear to give more support to the EH than do earlierstudies, which often use longer maturities and data of a lowerfrequency on coupon paying bonds and yield data on ‘bundlesof bonds’. If one is willing to assume that noise traderspredominate in the bond market at very short horizons, we canprovide some insights into empirical results, found in the literature.