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Ghana’s economy is characterised by acute exchange rate volatility alongside persistent and high consumer inflation. This places the economy among the sub-Saharan African countries with the highest inflation over the years. Therefore, we explore in-sample and out-of-sample macro-volatility spillovers to determine the effectiveness of monetary policy and also ascertain the relevance of the exchange rate in Ghana’s interest rate setting at both time and multiscale domains. The study reveals scale-dependent interconnectedness among the macro-variables as their causal linkages broadly intensify at the longer time-scale. We find the real policy rate and the exchange rate to be net transmitters of shocks, while inflation and output gaps are net receivers of shocks from the system. Output gap, however, is the largest net receiver of shocks from the system. The empirical findings generally buttress the prerequisite to uphold exchange rate stability in order to inure general macroeconomic stability in Ghana. In addition, the extent of spillover dynamics from policy interest rate to and from the targeted macro-variables (particularly output gap and inflation) appears to be moderate even in the long run, surmising less effective monetary policy transmission in Ghana.

We propose a smooth shadow-rate version of the dynamic Nelson-Siegel (DNS) model to analyze the term structure of interest rates during the recent zero lower bound (ZLB) period. By relaxing the no-arbitrage restriction, our shadow-rate model becomes highly tractable with a closed-form yield curve expression. The model easily permits the implementation of readily available DNS extensions such as time-varying loadings, integration of macroeconomic variables and time-varying volatility. Using U.S. Treasury data, we provide clear evidence of a smooth tran- sition of the yields entering and leaving the ZLB state. Moreover, we show that the smooth shadow-rate DNS model dominates the baseline DNS model in terms of fitting and forecasting the yield curve, while being competitive with a shadow-rate affine term structure model.

We show that government spending does play a role in shaping the yield curve which has important consequences for the cost of private and government financing. We combine government spending shock identification strategies from the fiscal macro literature with recent advancements in no-arbitrage affine term structure modeling, where we account for time-varying macroeconomic trends in inflation and the equilibrium real interest rate. We stress in our empirical macro-finance framework the importance of timing in the response of yields to government spending. We find that the yield curve responds positively but mildly to a surprise in government spending shocks where the rise in risk-neutral yields is compensated by a drop in nominal term premia. The news shock in expectations about future expenditures decreases yields across all maturities. Complementarily, we also analyze the effect of fiscal policy uncertainty where higher fiscal uncertainty lowers yields.

This study attempts to identify uncertainty in the long-term rate of interest based on the controversial interest rate theories of Keynes and Kalecki. While Keynes stated that the future of the rate of interest is uncertain because it is numerically incalculable, Kalecki was convinced that it could be predicted. The theories are empirically tested using a reduced-form GARCH-in-mean model assigned to six globally leading financial markets. The obtained results support Keynes's theory - the long-term rate of interest is a nonergodic financial phenomenon. Analyses of the relation between the interest rate and macroeconomic variables without interest uncertainty are thus seriously incomplete.

This paper summarises the work done by Eurosystem staff in the context of the Strategy Review Seminar on Monetary Policy Instruments. More specifically, it focuses on the efficacy, efficiency and potential side effects of the key monetary policy instruments employed by the European Central Bank since 2014. The following main findings emerge from the analysis. First, instruments have been effective in easing financing conditions and supporting economic growth, employment and inflation. Second, considering the effective lower bound on policy rates, a combination of instruments is generally more efficient than relying on a single tool. Third, side effects have been generally contained so far, but they are found to vary over time and need to be closely monitored on an ongoing basis. Fourth, the monetary policy toolkit needs to remain innovative, diversified, and flexible, i.e. reviewed regularly to ensure that it remains fit for purpose against the backdrop of evolving financial and macroeconomic conditions.

I analyze time series momentum along the Treasury term structure. Past bond returns predict future returns both due to autocorrelation in bond risk premia and because unexpected bond return shocks increase the premium. Yield curve momentum is primarily due to autocorrelation in yield changes rather than autocorrelation in bond carry and can largely be captured using a single bond return or yield change factor. Because yield changes are partly induced by changes in the federal funds rate, yield curve momentum is related to post-FOMC announcement drift. The momentum factor is unspanned by the information in the term structure today and is hence inconsistent with standard term structure, macrofinance and behavioral models. I argue that the results are consistent with a model with unpriced longer term dependencies.

Debido a la incertidumbre al respecto, en este artículo se analiza cuál podría ser la postura de política monetaria más adecuada para México: una que mantenga el objetivo de inflación sin afectar negativamente el crecimiento del producto. Se estima el valor de la tasa de interés neutral en México para los próximos cinco años con base en la regla de Taylor y un modelo vectorial autorregresivo (VAR) cointegrado (CVAR). Los resultados sugieren que la tasa de política monetaria se encuentra por arriba de la tasa neutral de interés, lo que, combinado con el potencial recorte de tasas a escala internacional, podría conceder al banco central durante casi todo el sexenio grados de libertad para mantener su tasa por debajo del nivel actual; en el corto plazo se podría recortar la tasa de política monetaria actual en 25 puntos al menos sin arriesgar la convergencia a la meta de inflación.

This paper introduces the reader into the apparatus behind the popular New Keynesian Phillips (NKPC) curve. It derives several log-linear versions of this curve and recursive formulations of the Calvo-Yun price staggeringmodel that is behind this curve. These formulations can be used for higher-order approximations of the NKPC or for implementations that use other non-linear solution techniques, as, e.g., projection methods.

This paper compares different implementations of monetary policy in a new-Keynesian setting. We can show that a shift from Ramsey optimal policy under short-term commitment (based on a negative feedback mechanism) to a Taylor rule (based on a positive feedback mechanism) corresponds to a Hopf bifurcation with opposite policy advice and a change of the dynamic properties. This bifurcation occurs because of the ad hoc assumption that interest rate is a forward-looking variable when policy targets (inflation and output gap) are forward-looking variables in the new-Keynesian theory., Macroeconomic Dynamics, Cambridge University Press (CUP), 2020

Referenzzinssätze spielen als Grundlage für zahlreiche Finanzprodukte eine wichtige Rolle in der Funktionsweise der weltweiten Finanzmärkte. Im Zuge des LIBOR-Skandals ist das Vertrauen in die Robustheit der Sätze erheblich gesunken. Infolgedessen haben Finanzregulierungsbehörden Prinzipien zur zukünftigen Gestaltung der Indizes entwickelt. Darauf basierend sind die bestehenden Benchmarks von Arbeitsgruppen der Zentralbanken in verschiedenen wichtigen Währungsräumen überarbeitet bzw. durch alternative Referenzzinssätze abgelöst worden. €STR, SONIA und SOFR ersetzen in der Eurozone, Großbritannien und den USA, die bis dato gültigen Tagesgeld-Benchmarks. Als Nachfolger für den ursprünglichen EURIBOR hat das European Money Markets Institute eine hybride Variante der Benchmark entwickelt. Der Arbeitsbericht diskutiert die Bestimmungsmethodik der neuen Referenzzinssätze. Um das implizite Kreditniveau der neuen Benchmarksätze zu verstehen, werden die zugrunde liegenden Berechnungen und Märkte ausführlich dargestellt. Der größte Unterschied im Euroraum liegt bei Übergang vom Overnight-Zins EONIA zu €STR, der als Einlagenzins jetzt 0,085% tiefer liegt.

Negative interest rates were once seen as impossible outside the realm of economic theory. However, several central banks have recently adopted negative policy rates. The Federal Reserve is coming under increasing pressure to follow suit in the wake of the coronavirus crisis. This paper investigates the actual effects of negative interest rates using the Swedish experience from 2015 to 2019. The Swedish Riksbank was one of the first central banks to introduce a negative interest rate in 2015 and the first central bank to abandon a negative rate in 2019. We find that negative rates had a modest effect on consumer price inflation due to globalization, but significant effects on the exchange rate and domestic asset prices, thus fostering financial imbalances. We conclude by discussing the implications of our results for larger economies such as the United States.

Four specifications of an affine model with risk aversion and no arbitrage conditions are estimated for the Mexican Term Structure of Interest Rates, contrasting their empirical properties and the accuracy of their in and out of sample forecasts. The traditional models are extended by adding macroeconomic variables to analyze if the latter provide sufficient information to improve the adjustment and the forecast of interest rates. Using monthly data of the Zero Coupon Bonds, VIX, WTI, exchange rate, inflation and growth in the period 2002-2017, it is found that, although there is no superiority of a single model for the in and/or out of sample forecast of the yield curve, adding macroeconomic variables helps to improve the short and medium term forecasts independently of the type of factors used.

The appearance of negative bond yields presents significant challenges for the fixed income markets, which mainly concern related forecasting models. The Nelson-Siegel-Svensson model (NSS) is one of the models that is most frequently used by central banks to estimate the term structure of interest rates. The objective of this study is to evaluate the application of the NSS model to fit the yield curve of a set of 20 countries, the majority from the Eurozone, which registered negative sovereign bond yields. We conclude that the model adjusted well for all countries' yield curves, although no changes or constraints were introduced. In addition, a comparison was carried out between market instantaneous interest rate and the interest rate for the very distant future, which the model can predict, with good results for the instantaneous interest rate. An evaluation of the possible behaviour of shared debt securities (i.e. Eurobonds) was also analysed. In conclusion, the NSS model seems to remain a valuable, easy to use, and adaptable tool, to fit negative yield curves, for monetary policy institutions and market players alike.

Wir vergleichen Immobilienkredite in Deutschland und der Schweiz im Hinblick auf Zinskonditionen und Zinsbindung seit Anfang der 1960er Jahre. Speziell stehen der Anteil fixer versus variabler Zinsen, die effektive Zinsbelastung und die Laufzeit des Kredites im Vordergrund. Wir finden, dass in beiden Ländern eine Finanzierung mit variablen Zinsen voreilhaft ist. Allerdings ist dieser Vorteil in der Schweiz weit weniger ausgeprägt. Dagegen ist die Volatilität der tatsächlich realisierten Finanzierungskosten in Abhängigkeit vom gewählten Startzeitpunkt in beiden Ländern ähnlich. Die Liquiditätsanspannung bei Immobilienkrediten mit variablem Zins ist infolge volatiler Rückzahlungsraten für die Kreditnehmer in der Schweiz erheblich stärker. Insgesamt sind die Bedingungen in einem Land nicht ohne weiteres auf das andere zu übertragen. We compare fixed-rate and adjustable-rate loans (mortgages) in Germany and Switzerland with respect to interest rate conditions and interest rate fixation since the beginning of the 1960s. Of special interest are the share of fixed compared to adjustable rate contracts, the effective interest burden and the terms to maturity. We find that in both countries a financing with variable interest rates is premature. However, this advantage is far less pronounced in Switzerland. By contrast, the volatility of actual financing costs, depending on the chosen starting point, is similar in both countries. The liquidity strain on variable rate real estate loans is much stronger as a result of volatile repayment rates for borrowers in Switzerland. Overall, the conditions in one country are not easily transferred to the other.

This paper examines the Swedish experience of forward guidance 2007-2018. We focus on three interrelated issues: first, the effects of forward guidance on the discussion within the Board of Directors of the Riksbank, second, on the communication between the Riksbank and the public, and third, on the interest rate expectations held by various groups in Swedish society. We conclude that forward guidance has had negative effects on the dialogue within the Board as well on the communication between the Riksbank and the public. In addition, forward guidance has failed to affect expectations about interest rates in a systematic and significant way. We trace the roots of these consequences to the inability of the Riksbank to forecast its future policy rate three years ahead with any reasonable accuracy. The Riksbank has learned from this dismal performance and partially abandoned forward guidance, returning to a focus on the rate of inflation – as it did prior to the introduction of forward guidance.

This paper investigates the role of monetary policy uncertainty for the transmission of FOMC actions to financial markets using a novel model-free measure of uncertainty based on derivative prices. We document a systematic pattern in monetary policy uncertainty over the course of the FOMC meeting cycle: On FOMC announcement days uncertainty tends to decline substantially, indicating the resolution of policy uncertainty. This decline is then reversed over the first two weeks of the intermeeting FOMC cycle. Both the level and the changes in uncertainty play an important role for the transmission of monetary policy to financial markets. First, changes in uncertainty have substantial effects on a variety of asset prices that are distinct from the effects of the conventional policy surprise measure. For example, the Fed's forward guidance announcements affected asset prices not only by adjusting the expected policy path but also by changing market-perceived uncertainty about this path. Second, at high levels of uncertainty a monetary policy surprise has only modest effects on assets, whereas with low uncertainty the impact is significantly more pronounced.

The purpose of this report is to derive lessons from inflation targeting in Sweden for the choice of the future monetary policy regime of Iceland. Swedish inflation targeting has been a success in terms of reducing inflation and inflation volatility, but real economic volatility is not lower compared to previous periods. In addition, financial imbalances have grown rapidly. A key lesson is that the Riksbank has closely shadowed the policy of the European Central Bank due to financial integration. In other words, the Riksbank has behaved as if Sweden had a fixed exchange rate to the euro. Our analysis clearly indicates that a small economy cannot pursue an independent monetary policy from the rest of the world in a financially integrated world. Consequently, we suggest a fixed exchange rate arrangement for Iceland, preferably through a currency board. A currency board would provide exchange rate and price stability. A currency board would require domestic reforms to enhance price and wage flexibility as well as proper regulations on the financial system to minimize the risk of future banking crises.

Wir stellen einer festen Zinsbindung von 10 Jahren bei Wohnungsbaukrediten eine monatliche an einem Kurzfristzins angepassten Zinsbelastung bei unterschiedlichen Rückzahlungsfristen gegenüber. Dafür werten wir Monatsdaten seit den 1950er Jahren für Deutschland aus. Damit greifen wir mehrere Zinszyklen, Zinserhöhungs- und Zinssenkungsphasen ab. Im Ergebnis finden wir, dass in der überwiegenden Mehrzahl der Fälle kurzfristig variable Zinsen eine geringere Zinsbelastung nach sich ziehen. Und diese weisen auch noch geringere Schwankungen auf. We compare fixed-rate (10 years) and adjustable-rate loans (mortgages) with different repayment periods for Germany. The sample starts in the 1950s, i. e. we include several interest rate cycles, periods with increasing and periods with decreasing interest rates, and use monthly data. Our findings reveal that in the overwhelming majority of cases variable rates yield lower interest rate costs. Furthermore, the total volatility of these costs is lower than that of fixed-rate loans.

Geostatistical spatial models are widely used in many applied fields to forecast data observed on continuous three-dimensional surfaces. We propose to extend their use to finance and, in particular, to forecasting yield curves. We present the results of an empirical application where we apply the proposed method to forecast Euro Zero Rates (2003–2014) using the Ordinary Kriging method based on the anisotropic variogram. Furthermore, a comparison with other recent methods for forecasting yield curves is proposed. The results show that the model is characterized by good levels of predictions’ accuracy and it is competitive with the other forecasting models considered.

In this research paper, we build a New Keynesian reduced-form macroeconomic model for Morocco. The model encompasses three main blocks: an aggregate demand equation (IS curve), a price-setting equation (Phillips curve) and a Taylor-type monetary policy rule. In our model, we consider a significant forward-looking component when explaining inflation dynamics, which enables us to include agent’s expectations. The downstream aim of this work is to provide the research community with new possibilities in terms of economic workhorse modelling, particularly for monetary policy analysis purposes.Keywords. Small scale model, Forward-looking expectations, Monetary policy, Fixed exchange regime.JEL. C32, E12, E17, E43, E47.

Recent studies documented a sufficient forecasting performance of shadow-rate models in the low yields environment. Moreover, it has been shown that including the macro-variables into the shadow-rate models further improves the results. We build on these findings and evaluate for the U.S. Treasury yields, whether the lower bound proximity was truly the only issue to reflect in the interest rate modeling since the Great Recession. Surprisingly, we discover that the relative importance of yield curve factors has changed as well. More specifically, instead of macroeconomic factors, financial market sentiment factors became dominant since the recent financial turmoil. Based on such finding, we show, that extending the macro-finance interest rate models by financial market sentiment proxies further improves the forecasting performance.