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How do real interest rates affect financial fragility? We study this issue in a model where bank borrowing is subject to rollover risk. A bank's optimal borrowing trades off the benefit from investing additional funds into profitable assets with the cost of greater risk of a run by creditors. Changes in the interest rate affect the price and amount of borrowing, which influence bank fragility in opposite directions. Thus, the marginal impact of changes to the interest rate on bank fragility depends on the level of the interest rate. Finally, we derive testable implications that may guide future empirical work. [ABSTRACT FROM AUTHOR]

We consider two possible approaches to the problem of incorporating explicit general (i.e., economic) inflation in the non-life claims reserve estimates and the corresponding reserve SCR, defined—as in Solvency II—under the one-year view. What we call the actuarial approach provides a simplified solution to the problem, obtained under the assumption of deterministic interest rates and absence of inflation risk premia. The market approach seeks to eliminate these shortcomings by combining a stochastic claims reserving model with a stochastic market model for nominal and real interest rates. The problem is studied in details referring to the stochastic chain-ladder provided by the Over-dispersed Poisson model. The application of the two approaches is illustrated by a worked example based on market data. [ABSTRACT FROM AUTHOR]

In a recent paper "Stochastic Chain-Ladder Reserving with Modeled General Inflation", the effects of modeled general inflation on non-life claims reserving were studied using, along with the so called "market approach", a stochastic two-factor market model, characterized by deterministic expected inflation. In the present paper, we repeat the same study, again with the market approach, using a three-factor market model which extends the two-factor model by including stochastic expected inflation. After detailing the theoretical model and estimating the relevant parameters on the same market data used in "Stochastic Chain-Ladder Reserving with Modeled General Inflation", we repeat the application to claims reserving presented in that paper and compare the results obtained with the two models. With these data, it is found that the inclusion of stochastic expected inflation produces a non-negligible increase in the reserve solvency capital requirement under the one-year view. [ABSTRACT FROM AUTHOR]

This study examines the crowding-out effect in Albania from 2000 to 2022, specifically investigating the relationship between government investment (GI) and private investment (PI). Using time series data for gross domestic product (GDP), GI, PI, and real interest rates (RI), we applied the Johansen cointegration test and vector error correction model (VECM) to analyse the long-run and short-run relationships among these variables. Our results indicate a significant long-run correlation between GI and PI, suggesting that increased government investment in Albania leads to reduced private investment, demonstrating the crowding-out effect. Moreover, we observe a positive connection emerges between real interest rates and private investment. Consistent with prior research, Funashima and Ohtsuka (2019) identified both crowding-out and crowding-in effects in Japan, echoing our findings. Similarly, Bedhiye and Singh (2022) noted a negative correlation between government and private investment in developing economies. These findings have critical implications for policymakers, underscoring the potential negative consequences of government investment on private investment and economic growth. Effective policy implementation necessitates a delicate equilibrium between government investment and its potential adverse effects. In summary, this study offers valuable insights into government-private investment interactions in Albania, highlighting the crowding-out effect and the influence of real interest rates. These insights contribute to informed policymaking for sustainable economic growth. [ABSTRACT FROM AUTHOR]

This paper provides quantitative modelling of the effect of three longer-term global transitions: the global demographic transition involving a marked reduction in population growth; a long-term slowdown in productivity growth which may continue, or may conceivably be reversed; and the disruption in the global economy due to increasing climate shocks and the implementation of climate policies that will be needed to reach net-zero emissions by 2050. We study the global investment needs to which these transitions will lead. We demonstrate that these investment needs will be both asymmetric across countries and over time. This asymmetry will lead to potentially large changes in trade flows and significant financial capital flows across national borders, and also to substantial real exchange changes and interest rate movements. The resulting large movements in international capital flows will have significant implications for the global financial system, which we demonstrate at the country and regional level. [ABSTRACT FROM AUTHOR]

This research paper aims to empirically analyze the relationship between economic growth and financial development, in the region of Western Balkan countries, over the period 2010-2020. The relationship is demonstrated by the effects of independent variables such as trade (T), inflation consumer prices (ICP), general government final consumption (GGFCE), domestic credit to the private sector (DCPS), broad money (BM), and the real interest rate (IR), on the dependent variable, such as GDP growth. Hence, to evaluate this impact, we employed the regression model. Although, a correlation matrix is presented to identify the relationship between the study variables. Based on the results presented, there is a positive relationship between trade, inflation rate, and interest rates. Additionally, based on the regression results that were produced using the fixed effect technique, it can be seen that trade (T), inflation (ICP), interest rates (IR), and domestic credit to the private sector (DCPS), positively impact economic growth. The main objective of this paper is to contribute to a better understanding of this connection and draw new conclusions that might greatly benefit policymakers and the Western Balkan community, by considering the fundamental role of the financial sector in sustainable economic growth. The study's second objective is to fill the vac-uum in the literature for this period and a sample of counties according to specific macroeconomic variables. [ABSTRACT FROM AUTHOR]

The digital transformation of the world in the first two decades of the 21st century took place in an unstable and deteriorating macroeconomic environment. The macroeconomic imbalances recorded in many countries revealed serious barriers to further socioeconomic development. The article assumes that the main disruptions observed at the beginning of the third decade of the 21st century in most of the world's largest economies are excessive inflation and very high indebtedness of public finance sectors. The simultaneous occurrence of these phenomena significantly complicates the effective implementation of economic policies. [ABSTRACT FROM AUTHOR]

We address the process of discounting in random environments, which allows valuation of the future in economic terms. We review several approaches to the problem regarding different well-established stochastic market dynamics in the continuous-time context and include the Feynman–Kac approach. We also review the relation between bond-pricing theory and discounting and introduce both the market price of risk and the risk neutral measure from an intuitive point of view devoid of excessive formalism. We provide the discount for each economic model and discuss their key results. We finally present a summary of our previous empirical studies for several countries on the long-run discount problem. [ABSTRACT FROM AUTHOR]

This paper focuses on GARCH modelling of the nominal short‐term interest rates of the Spanish government three‐year bonds. This methodology allows an ex‐ante approximation to this variable which proves to be a valuable alternative against econometric specifications that imply a homoscedastic error term. Then, real short‐term interest rates are estimated by employing the reduced Fisher equation. Eventually, the results obtained are compared with the observed values of the real time‐series in order to measure their accuracy. [ABSTRACT FROM AUTHOR]

In this paper we provide new empirical evidence relevant for discussions on monetary policy independence in the context of euro adoption in three Central and Eastern European (CEE) countries: Czechia, Hungary and Poland. Unlike many other authors, in this paper we focus on real and not nominal interest rates as real interest rates are at the hearth of modern macroeconomic and monetary policy theory. In the paper we employ several methodologies to test the convergence of real interest rates between these countries and the euro area and to determine the main drivers of real interest rates. Based on the unit root analysis we find evidence of convergence of real interest rates in these countries, thus confirming the real interest rate parity (RIRP) hypothesis. Next, using principle component analysis (PCA) we show that common factor extracted from the sample of CEE countries and individual euro area countries can explain high proportion of real interest rate developments in these countries. Finally, results of our newly proposed analytical framework for the analysis of determinants of real interest rates in small open economies, based on a Bayesian VAR model with block exogeneity, show that external shocks have non-negligible effect on real interest rate developments in selected CEE countries. Thus, our results indicate that real interest rates in CEE depend on factors that are beyond the scope of domestic monetary policy makers. In this sense we can conclude that (conventional) monetary policy independence in these countries is limited. Thus, we see the loss of monetary policy independence as overly emphasized argument in discussions on the euro adoption in these countries. However, we are aware that national central banks in CEE started to rely more on non-conventional measures recently, which gives them a higher degree of flexibility (and autonomy).

Purpose - This paper aims to examine the effect of both inflation rate and interest rate on stock prices using quarterly data on non-financial firms listed in DJIA30 and NASDAQ100 for the period 1999-2016. The stock duration model is used to measure the sensitivity in variations in inflation rates and interest rates on stock prices. Design/methodology/approach - The authors use standard statistical tools that include Johansen cointegration test, linearity, normality tests, cointegration regression, Granger causality and vector error correction model. Findings - The results of panel Johansen cointegration analysis show that cointegration exists between the stock prices, the changes in stock prices due to inflation rates and the changes in stock prices due to real interest rates. The results of cointegration regression show that inflation rates are negatively associated with stock prices, the real interest rates and stock prices are positively associated, changes in real interest rates and inflation rates Granger cause significant changes in stock prices, significant speed of adjustment to long run equilibrium between observed stock prices and real interest rates and significant speed of adjustment to long run equilibrium between changes in stock prices due to real interest rates and changes in inflation rates. Originality/value - This paper contributes to the empirical literature in three ways. The paper examines the effects of inflation and interest rates on stock prices differently from other related studies by separating inflation from real interest rates. The paper examines the causality between stock prices, interest and inflation rates. This paper offers significant updated validity to extended literature that a negative association exists between stock prices and inflation rates. This validity can be considered as an existence a theory of stock prices, inflation rates and interest rates.

Research background: The question of changes in real interest rates differentials between the Euro Area and the CEE countries in the last years is raised because of two main reasons. The first rationale is related to the growing importance of external financial factors for the CEE economies and their monetary autonomy. The second reason is associated with the unprecedented shift in monetary conditions in the EMU, brought about by negative interest rates policy and unconventional policies, and the way it impacts the real rates in the CEE economies. Purpose of the article: This paper aims at exploring the relationship between real interest rates in the Euro Area and ten countries: Albania, Bulgaria, the Czech Republic, Hungary, North Macedonia, Moldova, Poland, Romania, Turkey, and Ukraine. The analysis covers the years of 1999-2018, including periods before and after the financial and economic crisis. Methods: We employ Markov-switching regression to construct the ex-ante real interest rates series in each country, using monthly data on short-term interest rates and CPI inflation rates. A battery of unit root and stationarity test, both standard and panel ones, is applied to examine the real interest rate parity, also allowing for a structural break in the rate differentials. Findings & Value added: We provide detailed evidence on the real interest rates differentials for all of the CEE countries vis-à-vis the Euro Area. We find that, while panel stationarity tests point to the stability of real rate differentials, there are significant dissimilarities across the countries, and the results of the univariate tests are often mixed. At least half of the economies, however, reveal similar patterns of stationarity in real rates relationships. At the same time, we find differentials for the Czech Republic, Hungary, and Poland, countries highly integrated into the EMU economy, to be unstable over time.

This paper investigates how unit root tests that are designed for non-normal errors perform in the presence of unknown forms of nonlinearity. This allows us to examine whether any neglected nonlinearity in an estimation procedure could be reflected, at least partly, in the form of non-normality. Our simulation study shows that in general, univariate tests that exploit the information in non-normal errors remain relatively powerful compared to well-known nonlinear unit root tests under various forms of nonlinear alternatives. We also investigate the unit root properties of the real effective exchange rates and real interest rates for 60 countries. The results support the findings in the simulation that the neglected non-normality or nonlinearity in the existing tests is captured and used in the linearized testing procedures as a source of power improvement. [ABSTRACT FROM AUTHOR]

This paper investigates whether arbitrage opportunities exist between inflation-linked bonds and nominal bonds on the French Treasury market. Following arbitrage theory, we apply the risk hedging concept: we set up self-financing portfolios hedged against risks through durations of different orders. Perfectly hedged portfolios are those with a zero initial and a zero final value. The results show arbitrage gains when the first three duration orders are implemented, but they are not significantly different from zero when a fourth-order duration is added. Furthermore, a regression of arbitrage gains on the illiquidity measure of nominal and index Treasury bonds provides evidence that the illiquidity of inflation-linked bonds significantly explains arbitrage gains, whereas the illiquidity measure of nominal bonds does not. [ABSTRACT FROM AUTHOR]

We address the process of discounting in random environments, which allows valuation of the future in economic terms. We review several approaches to the problem regarding different well-established stochastic market dynamics in the continuous-time context and include the Feynman–Kac approach. We also review the relation between bond-pricing theory and discounting and introduce both the market price of risk and the risk neutral measure from an intuitive point of view devoid of excessive formalism. We provide the discount for each economic model and discuss their key results. We finally present a summary of our previous empirical studies for several countries on the long-run discount problem.

The economic literature focuses mostly on faster ageing of population among developed countries; however, many developing countries experience even more dramatic pace of this process. Mauritius, with the median age of population higher than the world average since 1990s, represents a prominent example of such a case. In this paper, we analyse demographic developments in Mauritius and discuss their macroeconomic implications using an open‐economy OLG model with demographic shocks. We project that a decline in the Mauritian interest rate and net foreign assets to GDP resulting from ageing will be accompanied by a temporary increase in GDP, consumption and investment. [ABSTRACT FROM AUTHOR]

Objective: The purpose of this study is to present a review of the negative interest rate policy of the Swiss National Bank (SNB) after the outbreak of the financial crisis, in the context of falling real interest rates. Furthermore, the article demonstrates the implications of this unconventional monetary policy for the Swiss economy as well as the financial market stability. Research Design & Methods: The study is completely based on literature research. The analysis should be interpreted as being mainly suggestive since empirical research based on a quantitative analysis was not conducted. This article examines and reviews extensive arguments and evidence of 97 scientific articles. The descriptive evidence presented has a strong focus on the situation in Switzerland. Findings: In economic literature, the discussion about transmission mechanisms of the monetary policy is conducted through several channels: the interest rate channel, the ex-change rate channel and other asset price channels. In Switzerland, the impacts of the negative interest rate policy (NIRP) implemented in 2015 can so far be felt in increasing credits, especially in mortgage claims. The net income of Swiss banks from the commission and service business fell. Moreover, the exchange rate of the Swiss Franc against the Euro could be stabilised to a certain degree. Implications & Recommendations: A negative interest rate policy has an immediate impact on short-run and long-run interest rates and on banks’ interest rate margins. Currently, monetary policy is taking a turn, especially in the US. However, the leeway for higher rates in Switzerland is limited due to the interest rate differential between short-term Eurozone and Swiss money market rates. Contribution & Value Added: This article provides insights into the determinants of real interest rates and into the short-run effects of NIRP on the Swiss economy.

Research background: The question of changes in real interest rates differentials between the Euro Area and the CEE countries in the last years is raised because of two main reasons. The first rationale is related to the growing importance of external financial factors for the CEE economies and their monetary autonomy. The second reason is associated with the unprecedented shift in monetary conditions in the EMU, brought about by negative interest rates policy and unconventional policies, and the way it impacts the real rates in the CEE economies. Purpose of the article: This paper aims at exploring the relationship between real interest rates in the Euro Area and ten countries: Albania, Bulgaria, the Czech Republic, Hungary, North Macedonia, Moldova, Poland, Romania, Turkey, and Ukraine. The analysis covers the years of 1999- 2018, including periods before and after the financial and economic crisis. Methods: We employ Markov-switching regression to construct the ex-ante real interest rates series in each country, using monthly data on short-term interest rates and CPI inflation rates. A battery of unit root and stationarity test, both standard and panel ones, is applied to examine the real interest rate parity, also allowing for a structural break in the rate differentials. Findings & Value added: We provide detailed evidence on the real interest rates differentials for all of the CEE countries vis-à-vis the Euro Area. We find that, while panel stationarity tests point to the stability of real rate differentials, there are significant dissimilarities across the countries, and the results of the univariate tests are often mixed. At least half of the economies, however, reveal similar patterns of stationarity in real rates relationships. At the same time, we find differentials for the Czech Republic, Hungary, and Poland, countries highly integrated into the EMU economy, to be unstable over time. [ABSTRACT FROM AUTHOR]

Japan’s more than a decade long “Great Recession” has presented a disconcerting case of what could happen if interest rates are bounded by zero and deflation sets in. Since Krugman (1998), the commonplace observation is that the deflationary situation combined with the zero nominal interest rate has caused elevated real interest rates, thereby nullifying monetary policy. This paper investigates this oft -cited claim and examines whether it is associated with anomalies in the way real interest rates are determined by employing an error correction model (ECM) based on the time-varying parameter model with Markov-switching variances. Using this model it is revealed that during the 1980s both ex ante and ex post rates were often lower than the equilibrium rates, indicating strong and persistent optimism among agents. However in the 1990s the ex ante real interest rate was persistently higher than the equilibrium, indicating the pessimistic expectations among agents. The time-varying speed of convergence to the equilibrium appears to slow down considerably in 1996-99, making the misalignment in the real interest rate process last twice as long as in the 1980s. In addition the analysis using the Smooth Transition Regression (STR) model shows a regime shift in the real rate process in mid-1995, three years before the implementation of the zero interest rate policy. This result suggests that a situation with an extremely low nominal interest rate, even before it reaches the zero bound, may create anomalies or nonlinearity in the effectiveness of monetary policy.

Changes in the size and the age structure of a population have a great impact on an economy, especially on national savings and capital flows. Poland's population, although still relatively young when compared to other developed countries, is expected to experience accelerated ageing and decline in forthcoming decades. In this paper, we assess the effects of these processes for Polish economy. Using an open-economy OLG model with demographic shocks and a variable retirement age, we simulate dynamics of real interest rates, main macro aggregates as well as net foreign assets to GDP.We show that rapid ageing will reduce the interest rate gap between Poland and the developed countries by 1.3-2 p.p. We also document a strong positive relationship between interest rates and the retirement age and find that the decline in the interest rate in Poland is primarily driven by the surviving probability shock. [ABSTRACT FROM AUTHOR]

The purpose of this study was to analyze the factors that affect employment and the most dominant factor in influencing the labor absorption in the small micro and medium enterprises in the city of Jambi. Methods of data analysis used in this research is the model of multiple linear regression (OLS), by using data from the years 1993-2010 time series derived from the Central Statistics Agency (BPS) and Bank Indonesia Jambi. The results of data analysis showed that real wages and a significant negative effect on employment in micro and gross fixed capital formation has positive and significant impact on employment in micro businesses in the town of Jambi. The real interest rate significant negatif and the regional real wages in small and medium enterprises in the city of Jambi has positive and significant. Variable the real wage is more dominant in affecting employment in micro, small and medium enterprises in the town of Jambi.

Objective: The purpose of this study is to present a review of the negative interest rate policy of the Swiss National Bank (SNB) after the outbreak of the financial crisis, in the context of falling real interest rates. Furthermore, the article demonstrates the implications of this unconventional monetary policy for the Swiss economy as well as the financial market stability. Research Design & Methods: The study is completely based on literature research. The analysis should be interpreted as being mainly suggestive since empirical research based on a quantitative analysis was not conducted. This article examines and reviews extensive arguments and evidence of 97 scientific articles. The descriptive evidence presented has a strong focus on the situation in Switzerland. Findings: In economic literature, the discussion about transmission mechanisms of the monetary policy is conducted through several channels: the interest rate channel, the ex-change rate channel and other asset price channels. In Switzerland, the impacts of the negative interest rate policy (NIRP) implemented in 2015 can so far be felt in increasing credits, especially in mortgage claims. The net income of Swiss banks from the commission and service business fell. Moreover, the exchange rate of the Swiss Franc against the Euro could be stabilised to a certain degree. Implications & Recommendations: A negative interest rate policy has an immediate impact on short-run and long-run interest rates and on banks' interest rate margins. Currently, monetary policy is taking a turn, especially in the US. However, the leeway for higher rates in Switzerland is limited due to the interest rate differential between short-term Eurozone and Swiss money market rates. Contribution & Value Added: This article provides insights into the determinants of real interest rates and into the short-run effects of NIRP on the Swiss economy. [ABSTRACT FROM AUTHOR]

We present a model of the relationship between real interest rates, credit spreads, and the structure and risk of the banking system. Banks intermediate between entrepreneurs and investors, and can monitor entrepreneurs' projects. We characterize the equilibrium for a fixed aggregate supply of savings, showing that safer entrepreneurs will be funded by nonmonitoring banks and riskier entrepreneurs by monitoring banks. We show that an increase in savings reduces interest rates and spreads, and increases the relative size of the nonmonitoring banking system and the probability of failure of monitoring banks. We also show that the dynamic version of the model exhibits endogenous boom and bust cycles, and rationalizes the existence of countercyclical risk premia and the connection between low interest rates, tight credit spreads, and the buildup of risks during booms. [ABSTRACT FROM AUTHOR]

We propose a pairwise procedure to test the Feldstein-Horioka condition of capital mobility. In contrast to the existing approach, we explicitly examine the relationship between domestic investment and foreign savings rather than domestic savings. In terms of addressing the Feldstein-Horioka puzzle, our results based on a panel of OECD and emerging market economies initially suggest that the depth and extent of capital mobility remain generally limited and that mobility has increased over the past 20 years. However, in contrast to existing studies, we find that capital mobility between Euro and EU pairs is more extensive than between pairs that involve other countries. If our sample is expanded to include emerging markets, we find that capital mobility has also increased though is weaker than for OECD economies. We provide additional insight in terms of consistency between our assessment of capital mobility based on the Feldstein-Horioka condition (a quantity approach) and a price approach based on real interest rate differentials. [ABSTRACT FROM AUTHOR]

This study examines whether real interest rates exhibit changes in persistence for a panel of Organization of Economic Cooperation and Development countries. The findings show that for long-term real interest rates there are changes in persistence from I(0) to I(1). For short-term real interest rates, the results display the absence of changes in persistence, while under cross-sectional dependence there is only weak evidence of changes in persistence from I(1) to I(0). The evidence of changes in persistence when the direction is considered unknown is even weaker. [ABSTRACT FROM AUTHOR]

The focus of this research holds the most important determinants of real exchange rate covered by various theoretical models. The empirical testing was carried out on the real exchange rate between RSD and Euro for the period from January 2007 to December 2010, which was significantly imposed by availability of consistent time series. The research pertains to five basic model specifications and is based on the testing of time series cointegration by applying Johansen and Engle-Granger’s test. The obtained results have shown that the observed models do not have grounds in empirical data. Time series figuring in models are not cointegrated, and besides that, the estimated cointegration coefficients have signs opposite to the expected ones in large number of cases. In our opinion, the reasons for such findings can be found in the fact that used time series are quite short, i.e. they pertain to the period of only four years, as well as that prices of some significant services are still under the administrative control. Still, despite the aforementioned lacks, we think that our findings can be accepted as preliminary knowledge about the ability of the observed models to explain the dynamics of real exchange rate between RSD and Euro.

The role of structural breaks in long spans of ex-post real interest rates for 10 industrialized countries is studied. First, the persistence of the real interest is assessed with newly proposed low-frequency tests of Müller and Watson (2008). Second, the test of Leybourne et al. (2007) for a change in persistence of a time series is applied to the real interest rate. The results show that real interest rates over the full sample period do not fit a covariance-stationary or unit-root model, nor a fractionally integrated, near-unit-root or local-level model. Instead, the persistence of real rates changes over time and there are periods when the real rate is covariance-stationary and other periods when it follows a unit-root process. [ABSTRACT FROM AUTHOR]