E43 - Interest Rates: Determination, Term Structure, and EffectsNávrat zpět

Purpose: This paper aims to examine the real interest rate parity (RIP) theory for EU5 countries (France, Germany, Italy, Spain and the UK) versus the USA. Design/methodology/approach: Utilizing RALS-FADF and RALS-FKSS unit root tests, this study addresses non-normality, non-linearity and structural breaks in real interest rate differentials. Findings: The results confirm the RIP theory, indicating mean reversion of real interest rate differentials and highlighting impact of financial integration on monetary policy independence and arbitrage opportunities. The study notes that central banks' ability to influence domestic economies through interest rates is limited due to global financial interconnectedness. Originality/value: The paper offers a new test and bases its empirical setup on whether interest rate differentials are non-normally distributed. The test also considers real interest rate non-linearity and the non-normality in the analysis.

The non-maturing deposit (NMD) pass-through rate represents a key parameter needed in the process of managing interest rate risk of the banking book (IRRBB). NMD interest rates for retail and corporate segments are usually not directly linked to market interest rates, but depend rather on the bank’s marketing strategy, market competition, liquidity, and possibly on other factors. The ratio at which banks adjust their NMD interest rates to changes in interbank market interest rates is known as the NMD pass-through rate. The goal of this paper is to analyse the variability of NMD pass-through rates in the 19 Eurozone countries and identify their possible determinants. The pass-through rates are estimated using cointegration analysis based on datasets available from the ECB Statistical Data Warehouse and the results show significant variability between countries. To analyse the determinants of pass-through rates in the Eurozone, the rates are regressed on nine aggregates of the country-level banking sector including concentration, profitability or funding, and three macroeconomic and socio-economic variables. Out of the tested predictors, the ratio of wholesale funding to liabilities was found to be the most significant predictor of retail and corporate pass-through rates, with a positive coefficient, indicating that countries where banks rely more heavily on wholesale funding exhibit higher pass-through of market interest rate changes to NMD deposit rates. Additionally, the loan-to-deposit ratio was found to have a significantly negative impact on retail pass-through rates, while the return on equity has a significantly positive impact on the corporate pass-through rates.

Analysis of Relations in Uncovered Interest Rate Parity: Example of CZK/EUR Exchange Rate The aim of the paper is to make an empirical verification of both concepts of the validity of uncovered interest rate parity, ex post and ex ante, using the predicted CZK/EUR exchange rate (for one month and one year) as a proxy variable for market expectations. We formulate the difference between the econometric procedures applied in the case of stationary and non-stationary time series. We perform a cointegration analysis and empirical verification of the error correction model, where PRIBOR interest rates and the actual and expected development of the CZK/EUR spot rate act as endogenous variables. The foreign EURIBOR interest rate (one-month and one-year) is considered an exogenous variable in our analysis, as we do not assume the influence of the Czech economy on this interest rate. We have found that long-term cointegration relations within the uncovered interest rate parity are determined by the inflation-targeting policy pursued by the CNB since 1998. In short-term relations, the foreign EURIBOR interest rate determines the development of the domestic PRIBOR interest rate. The development of the CZK/EUR spot exchange rate is sensitive to changes in the VIX global financial risk indicator. Growth of the VIX indicator leads to a weakening of the Czech koruna on the one-month time horizon and to its retrospective strengthening over the one-year time horizon. Changes in the expected CZK/EUR spot exchange rate respond in a corrective way to previous changes in expectations, in the case of both month- ly and annual forecast horizons. The depreciation (appreciation) of the CZK/EUR spot ex-change rate is associated with the subsequent expected depreciation (appreciation) of the ko- runa exchange rate. This fact signals the adaptability of exchange rate expectations over the monthly and annual forecast horizons.

This paper tests the usability of the Taylor rule under the conditions of the Czech economy using a single-equation error correction model in the period from 2000 to the second quarter of 2019 and finds key variables for the CNB's monetary policy setting. Other important monetary policy rules and their effect on the optimal monetary policy setting are also discussed. The starting point of the empirical part is a summary of the current monetary policy of the CNB and an analysis of its decision model. Since 2008, the new DSGE model g3 replaced the previous QPM model. At the end of the theoretical part, foreign experience and various approaches to the estimation of the Taylor rule are summarized. The CNB's two-week repo rate is best described by the size of the output gap in the domestic economy, the ECB's base refinancing rate, the change in the price level measured by the consumer price index and the previous value of the repo rate. The paper also analyses the relationship between the repo rate and the ECB's basic refinancing rates, confirming the historically high dependence of domestic monetary policy on the ECB's actions.

In an effort to stimulate aggregate demand at the zero lower bound, economists and central bankers have focused on inflation expectations. The key argument is that an increase in inflation expectations may reduce the real interest rate and thus encourage consumption spending. This article examines not only the traditional channels of the fall in the interest rate connected to the relative importance of the substitution and income effects, but it also investigates the impact on the perceived real future labour income. It is shown that if people do not adjust their expectations about future nominal labour income when inflation their expectations rise, the effect on present consumption can be negative, and the aggregate demand might be reduced rather than increased. A graphical and mathematical analysis in the paper exposes the relative importance of traditional channels and this new channel. It is shown that the traditional perspective is only a special case of a more general approach.

The paper deals with the issue of interbank interest rate pass-through into client interest rates offered by banks in the condition of Slovak Republic between 2004 and 2016. We provide an overview of studies of the interest rate relationship analysis in the bank and interbank market. We investigate the interest pass-through from money market rates to various loan and deposit rates. The analysis is carried out using the methodology of cointegration error-correction model, which take into account both the long-term and the short-term aspect of interest rate development. Our results point to considerable differences in the size of the pass-through with respect to either different loan and deposit rates. It has also shown a low rate of immediate transmission, the incompleteness of the pass-through, higher efficiency in the process of interbank interest rates pass-through into the interest rates on loans, and we can conclude that the process of interest rates pass-through in our conditions is relatively stable.

The paper is devoted to the topic of investment with emphasis on their position within the transmission mechanism of inflation targeting. It briefly discusses starting-points of inflation targeting regime, individual transmission channels of monetary policy, and routes through which the central bank may influence the investment. There are mentioned selected investment theories. Other factors, whose changes may induce changes in investment, are derived using these theories. Using available data, sources of investment variability are verified for the Czech Republic. Correlation analysis is performed and the vector error correction model is compiled. It seems that rise of aggregate demand is transformed into rise of investment. Similarly in case of asset prices. Appreciation of CZK is reflected in decline of investment. All three relations are consistent with the theory. On the contrary, sensitivity of investment to changes in market expected real interest rates is not clear.

The paper explains modern liquidity crisis and financial contagion from shadow banking system to money market in 2007-2009. Liquidity shock was massive due to high connectivity with the quality of underlying (securitized) assets. Thus, the problem of solvency was main driver of the liquidity crisis on the interbank market. Counterparty risk was transmitted to the money market through various channels: direct or indirect exposition to shadow banking, confidence channel, asset price channel and wholesale funding run. The structure of paper is following: first part analyzes financial market infrastructure of shadow banking, wholesale funding (originate-to-distribute) model and ABCP market; the second one describes financial market turmoil and contagion to the money market. Liquidity crisis strongly hit many segments of the money market: unsecured money market, repo market, FX swap market, Eurodollar market. Liquidity crisis was severe due to strong correlation between counterparty risk and liquidity premium as well between funding and market liquidity. Monitoring of the main causes of the liquidity crisis in his early stages is important for the fast reaction by central banks in terms of collateral quality and quantity of the reserve´s supply.

The aim of this paper is to show that the current anti-deflationary rhetoric of central banks lacks adequate support from the economic literature. Based on pure theory, there might be both positive and negative effects of deflation on economic development. The historical record is, if anything, also ambiguous. As recent literature reveals, a substantial number of deflationary periods were accompanied by robust economic growth. The two frequently mentioned examples of dismal deflationary periods - the Great Depression in the United States and the lost decades in Japan - seem to be exceptions. Taking into account the arguments presented in this paper, we argue that central banks should revise their communication strategy. If there is a need to defend easy monetary policy, the main argument should be based, dominantly, on the divergence of forecasted inflation from the inflation target, with a much lesser emphasis on the need to avoid the allegedly destructive effect of deflation.

Since 2014, European Central Bank and Bank of Japan have entered into the unchartered water of modest negative nominal interest rates, when they broke zero lower bound. Large-scale asset purchases and forward guidance effects are limited by zero nominal bound if yield curve is absolutely flat. Negative interest rate has been implemented with the aim of reinforcing effects of unconventional monetary policy and lowering real interest rates. Therefore, another decrease in nominal yield curve should ensure, that inflation target will be met in a medium term horizon. Main goal of the paper is to reveal implementation, transmission channels and risks associated with the negative interest rates. Implementation was successful within the existing framework of the current monetary policy. Negative effective interest rate has been reflected in sharp drop of governments yield curve and mortgage rates. According current constellation of negative interest rates, monetary effect outperforms potential unintended impacts. On the other side, there are many risks mainly for financial stability and financial market functioning, if negative interest rates will be under effective zero lower bound or will persists for an extended period.

The paper examines the quantitative easing as a policy contributing to government debt sustainability in the context of government debt cycle. Thus, the emphasis is primarily not put on the rescue of financial system after the collapse of Lehman Brothers. Instead, the attention is paid to a role of central bank as a lender of last resort in government bond markets and quasi-fiscal motivation of the quantitative easing programs. The theoretical part of the analysis defi nes quasi-fiscally motivated QE program, government adjusted net debt position plus its determinants and a rate of debt monetization. Empirical analysis focuses on the case of three large economies - United States, United Kingdom and Japan, empirical defi nition of quasi-fiscally motivated quantitative easing, net debt position of their governments as well as the explanation of significant empirical relationships between its determinants. The paper concludes that the most important factor infl uencing net debt position dynamics is economic growth which cannot be relied on in bust phase of debt cycle. Thus, the decisive role is played by quantitative easing and related interest transmission channel as remaining factor influencing dynamics of government fnancial assets and liabilities.

Very low real rates of interest observed in modern economies might be caused by the fact that the natural rate of interest declined to a zero level. This article shows that a zero or a negative natural interest can be explained by the Böhm-Bawerkian and neoclassical theory. Firstly, two senses of time preference are introduced in a discounted utility model, and key determinants of the zero interest rate on the side of time preference are discussed in detail. Secondly, a simple general equilibrium model with fixed intertemporal endowment is presented. Within this model, a decreasing shape of the income stream is identified as a major source of zero interest along with a low intertemporal elasticity of substitution in consumption. Even in the world of zero or negative natural interest, it might be optimal to be a lender. The last section focuses on the role of marginal productivity of capital in the model, stressing the role of this phenomenon on one side and time preference on the other in lowering the natural rate of interest to a zero level.

The paper explains wider economic, financial and macroeconomic context of the unconventional monetary policy during 2001-2006 in Japan. The objective of the article is complex discussion of Bank of Japan's unconventional monetary policy measures from theoretical and practical point of view. The structure of the papers is following: the fi rst part reveals macroeconomic condition behind unconventional monetary policy, the second part describes changes in monetary policy implementation, focuses also on commercial assets purchasing and describes exit strategy as well. The last part of the paper evaluates unconventional monetary policy impacts. Bank of Japan achieved accommodative financial condition and reduced uncertainty in the money market. Large liquidity buffer works preventive in case of unexpected liquidity shocks. Excess ample liquidity did not support prices and real economic activity considering broader deleveraging process and corporate markets fragmentation. Entry and exits strategy was successful without financial markets disruption but exit was not complete. Finally, the paper can conclude, that unconventional monetary policy had positive stabilization effect without significant transmission to the real economy.

The aim of this paper is to empirically investigate the explanatory power of Austrian business cycle theory (ABCT). My dataset consists of US quarterly time series within the period 1978-2013. Following Wainhouse (1984), Keeler (2001) and others I employ Granger causality as one of the primary tools of the analysis. Furthermore I also add impulse response functions to analyse the observed relations in closer detail. Two main hypotheses were tested. First one analyses how changes in interest rate affects relative proportion of investment and consumption outlays. Second hypothesis investigates how labour resources are reallocated as a consequence of an increase in interest rate. In both hypotheses, two concepts of interest rate were employed. Application of "explicit" interest rate does not seem to generate significant results. On the contrary, results fit in the Austrian story much better when implicit rate is employed. The traditional version of ABCT, which relies more on explicit interest rates, seems to suffer from invalid assumption about the allocation of credit during expansionary phase of business cycle.

The paper deals with interest rate volatility interpretation in the dealer's model of optimal interest margin. It defines main sources of interest rate volatility and studies how specific source of volatility influences optimal interest margin. Special attention is focused on unexpected shock in liquidity of banking system, actual central bank's decision on targeted level of interest rate, long-term deviation of inflation and output from central bank's targeted values and potential impact of these factors on term premium instability. Sources of interest rates are discussed in term of bank's refinancing/reinvestment risk with an attempt to formalize interest rate volatility for further empirical research. Our conclusion is that dealer's model of optimal interest margin is consistent with only permanent shocks to banking system liquidity and long-lasting central bank's surprises with its monetary policy that increase a level of refinancing/reinvestment risk faced up by banks. On the other hand it is not consistent with interest rate volatility caused by transitory liquidity shocks, expected current changes in central bank's targeted main policy rate and long run trends in main policy rate based on disinflation.

The aim of our paper is to formulate and empirically verify the simple backward looking econometric model of the monetary rule, which would be able to describe the development of CNB repo rate, namely only on the basis of statistically measured and in the given time available information. We focus on the period after 1998, when the CNB's inflation targeting policy is implemented and the repo rate (14 days) plays the role of the monetary policy rate. In the paper we discuss some methodological problems associated with the "ex post" empirical verification of the central bank monetary rule. We construct an empirical model of the monetary rule, justify the choice and the inclusion of explanatory variables, we analyze the statistical properties of time series and verify the alternative forms of econometric models. Our analysis showed that the development of CNB repo rate in the reporting period can be explained by the past and present evolution of three explanatory variables: the yearly inflation rate, the exchange rate and the ECB repo rate. The annualized inflation rate proved to be statistically insignificant in the model. We find interesting that the statistical quality of the estimated model was further increased after a six-month delay of the yearly inflation rate. The obtained results indicate that in determining the CNB repo rate the expected future level of the yearly inflation rate does not play important role and the last yearly inflation rate is more important than its present level.

The paper deals with accumulation of foreign exchange reserves of central banks and its consequences in banking system liquidity management. In theoretical part the case of banking system liquidity surplus is analyzed focusing on creation of liquidity through FX operations, sterilization of liquidity and main sources of liquidity absorption. In this context it is analyzed how monetary policy instruments (on outright or repo basis) enable central bank to react on volatility of banking system liquidity needs and to cover issued currency in circulation and bank's reserves by net foreign assets. In empirical part these problems are analyzed and compared using the example of the Czech Republic, Poland and Hungary. The paper focuses on main differences in the level of liquidity surplus, cost of sterilization, volatility of spread between O/N reference interest rate and main policy rate, main sources of liquidity absorption and dynamics of currency in circulation and reserves covering by net foreign assets.

This study presents an analysis of the sources of variability of interest rates in the money market in the context of Czech National Bank's (CNB) monetary policy. The factors in question are changes in the structural characteristics of economies in transition, changing perception of inflation risks, the inconsistency of central bank's monetary decisions and central bank's weakened credibility and uncertainty about the efficient transmission of monetary measures. The empirical analysis documents non-stationary variability of ultra short-term PRIBOR interest rates and stability of longer maturity PRIBOR interest rates. These results reflect the role of CNB in bank system liquidity management, the uncertainty about the timing of CNB's monetary policy at the changing speed of the appreciation of the crown, tendencies of overestimation of expected inflation and changing structural characteristics.

The paper analyzes the relationship between interest rate transmission mechanism and bank's management of interest rate risk during the disinflation monetary policy in the Czech Republic in 1999-2006. In theoretical part, main determinants of short-run and long-run equilibrium of client interest rates are discussed (market power, duration of credits and deposits, pricing mechanism, credit risk, operation efficiency). Using the error correction model, sensitivity of credit and deposit interest rates on market interest rates is tested. It is found out that in the short equilibrium client interest rates changes follow dynamics of CNB repo rate, the sensitivity of credit and deposit interest rates differs and banks face up the pressure on interest margin. The cointegration analysis confirms change of equilibrium interest rate margin in the long-run and supports hypothesis of consistency between Czech National Bank monetary policy and its expected outcomes by banks.

The paper deals with the impact of new information on the fixed income market. We expect this to be the first study covering such a topic in Central European markets. We prepared a model of a market reaction and found out that the market is not significantly driven by new macroeconomic figures. The sharpest moves have never been caused by a new number, but developments abroad and unexpected statements of central bankers. Scheduled central bank decisions on the interest rates did not affect yields as much as these two factors. The main message of this text for short term investors is, that in contrast to the USA, it is better for them to follow trading abroad than the Czech fundamentals.

The paper deals with theoretical and empirical aspects of the interactions between monetary policy and swap rates in the Czech Republic in 1999 through to 2005. In the theoretical part main sources of volatility of swap and forward rates on changes of repo rate are studied (actual stage of business cycle and changing level of monetary restriction, investor's misunderstanding of future main policy rate dynamics or inconsistency between expected monetary policy outcomes and actual dynamics of real level of repo rate). The empirical analysis proved low sensitivity of Czech crowns swap and forward rates to CNB repo rate changes, high volatility of interest rates relations in case of long-lasting repo rate changes and also problems with CNB's credibility at the beginning of 2000's. It was also found out that investor's mid-term and long-term inflation expectation could differ substantially due to expected convergence of economy to low inflation economic system.

Effectiveness of actual monetary policy depends on the ability of central banks to stabilize the fluctuations of overnight interest rates around their official policy rate. To ensure the functionality of the stabilization mechanism needs the successful balancing between bank's demand for reserves and central bank's supply of the reserves in interbank market. I discuss the main sources of temporal gaps between the demand for and the supply of the reserves and their impact on the volatility of overnight interest rates. In our theoretical explanation there is stressed the role of intertemporal substitution in fluctuation of demand for reserves. In the empirical part there is analysed the behaviour of overnight interest rates in the Czech interbank market (2001 - 2004) in the context of excess liquidity. Some structural changes in interbank market were found - undershooting of non-stability of excess liquidity and decline of overnight interest rates volatility due to new possibility of intraday credit.

In the inflation targeting regime the central bank makes a decision about interest rate adjustment based on a forecast, primarily of inflation. Thus a big part of the decisions on interest rate adjustments corresponds to systematic response of central bank to expected economic development. The systematic part of monetary policy - the decision pattern of central bank (similarly as behaviour of other economic agents) must be approximated for purposes of creating a forecast. The aim of this article is to approximate it through estimated monetary policy rule.

Since 1980's many central banks have been changing their monetary strategy to explicit inflation targeting. This new monetary concept is based on management of short-term interest rates in the context of relation between inflation prediction and central bank inflation target. Therefore we try to analyze the crucial problems of efficiency of the inflation targeting strategy - the causality and sensitivity between interest rates on Prague interbank market (PRIBOR) and Czech National Bank repo rate. For this purpose we use the framework of expectation theory with the term premium and simple deterministic regression models. We found out that as repo rate was sticky it led to higher volatility of PRIBOR before repo rate change and when the maturity of PRIBOR was increasing the sensitivity of PRIBOR to repo rate changes was strongly decreasing. In our opinion it's the result of at least partial adjustment of PRIBOR before repo rate changes.

The paper consists of four parts each of them devoted to a practical aspect of inflation targeting as conducted by the Czech National Bank. The first part outlines the reasons that led to the adoption of this monetary regime and summarises other advantages for effective and transparent decision-making. The second part addresses the issue of missing inflation targets. It is argued that simple confrontation of targets with actual behaviour of inflation may give a distorted view about the actual performance of monetary policy. The third part discusses a subtle methodological controversy about the difference between so-called escape clauses on the one hand and net inflation on the other. In the last section the author presents his critical view about the role of unconditional forecast in its capacity to indicate future interest rate decisions and to provide a realistic description of transmission mechanism in a small open economy.