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This chapter examines the effect of changes in the public debt–gross domestic product (GDP) ratio on long, 10 year, interest rates in a panel of 17 countries over the period 1870–2016 controlling for other variables, in particular the world interest rate. Over this long period, one can argue that most of the big changes in public debt were the product of factors largely exogenous to national interest rate determination, such as war, depression or financial crisis. The issue is of current relevance since the Covid-19 pandemic has caused large increases in the ratio of public debt to GDP in many countries. The estimates suggest that it is the change in debt, rather than the level of debt or the deficit that matters for long interest rates. World interest rates have long- and short-run effects on interest rates which are very well determined and close to one. Current inflation has a small but significant effect.

This chapter conducts an event study of 30 quantitative easing (QE) announcements made by 21 central banks on daily government bond yields and bilateral US dollar exchange rates in March and April 2020, in the midst of the global financial turmoil triggered by the COVID-19 outbreak. The chapter also investigates the transmission of innovations to long-term interest rates in a standard GVAR model estimated with quarterly pre-COVID-19 data. The authors find that QE has not lost effectiveness in advanced economies and that its international transmission is consistent with the working of long-run uncovered interest rate parity and a large dollar shortage shock during the COVID-19 period. In emerging markets, the QE impact on bond yields is much stronger and its transmission to exchange rates is qualitatively different than in advanced economies. The GVAR evidence that the authors report illustrates the Fed’s pivotal role in the global transmission of long-term interest rate shocks, but also the ample scope for country-specific interventions to affect local financial market conditions, even after controlling for common factors and spillovers from other countries. The GVAR evidence also shows that QE interventions can have sizable real effects on output driven by a very persistent impact on long-term interest rates.

Long-term interest rates of small open economies (SOE) correlate strongly with the USA long-term rate. Can central banks in those countries decouple from the United States? An estimated Dynamic Stochastic General Equilibrium (DSGE) model for the UK (vis-á-vis the USA) establishes three structural empirical results: (1) Comovement arises due to nominal fluctuations, not through real rates or term premia; (2) the cause of comovement is the central bank of the SOE accommodating foreign inflation trends, rather than systematically curbing them; and (3) SOE may find themselves much more affected by changes in USA inflation trends than the United States itself. All three results are shown to be intuitive and backed by off-model evidence.

The purpose of this paper is to examine the extent of financial integration occurring in East Asia. Increasing economic integration in East Asia over the last two decades has been evidenced by consistent growth in intra‐regional trade and investment. Greater economic integration in the region, accompanied by financial deregulation and liberalization, has contributed to greater financial integration. This study confirms increasing degree of financial market integration in East Asia by comparing movements of monthly money market rates before and after the Asian financial crisis. Convergence of interest rates across the countries in East Asia is examined by analyzing deviations, correlation coefficients and multivariate co‐integration tests of interest rates.

What causes the downward trend of real interest rates in major developed economies since the 1980s? What are the challenges of the near-zero interest and inflation rates for monetary policy? What can the policymakers learn from the latest developments in the monetary and interest rate theory? This paper aims to answer these questions by reviewing both basic principles of interest rate determination and recent academic and policy debates.

The paper critically reviews the explanations for the downward trend of real interest rates in recent decades and monetary policy options in a near-zero interest rate environment.

The decline of real interest rates is likely an outcome of multiple technological, social and economic factors including diminished productivity growth, changing demographics, elevated tail-risk concerns, time-varying convenience yields of safe assets, increased global demand for safe assets, rising wealth and income inequality, falling relative price of capital, accommodative monetary policies, and changes in industry structure that alter the investment and saving behaviors of the corporate sector. The near-zero interest rate limits the space of central banks' response to economic crises. It also challenges some conventional wisdoms of monetary theory and sparks radically new ideas about monetary policy.

This survey differs from the existing work by taking a broader view of both economics and finance literature. It critically assesses the economic forces driving the global decline of real interest rates through the lens of basic principles and empirical evidence and discusses the merits and limitations of each proposed explanation. The study emphasizes the importance of a better understanding of economic forces driving diverging trends of corporate investment and saving behaviors. It also discusses the implications of the neo-Fisherism and the fiscal theory of price level for monetary policy in a low interest rate environment.

The most prominent and persistent problems of our global monetary system are instability and imbalances. We propose an international monetary model to solve these problems while at the same time move the model closer to Maqāṣid Sharīʿah (objectives of Sharīʿah). We name this an organic global monetary model or abbreviated as OGM. OGM is an international monetary model directly built on the national monetary system of each member country so that the two can co-exist.

Model design, theory and literature.

The model can eliminate interest rates at the central bank level, create non-tradable international money, and make a more stable international monetary system.

Original.

Banking and finance during the past several decades have become “re‐internationalized,” not simply “internationalized.” This becomes clear when we compare the institutional features of banking and finance today with those in the early part of this century, the last period in which both had a substantial international dimension. It is further apparent in historical data that are analyzed in the paper: cross‐country spreads between real interest rates over the long period 1835 to 1990, and figures for gross foreign assets available for a number of major countries at key points in time from 1885 to 1994. The paper concludes by discussing the factors responsible for the changes that have occurred in banking and finance during the past several decades.

Focuses on Roscher′s generalities in the financial realm. Roscher postulated a secular decline in interest rates and an evolution of credit towards increasingly productive applications. Although Roscher′s theories were plausible, questions whether he got his causes and effects right. If not, of what use was his historical methodology as a predictive quasi‐science? Points out that Roscher, like his contemporaries, failed to anticipate the proliferation of war debt and other public debt, consumer debt, corporate takeover financing and other non‐productive uses of credit. Concludes by comparing Roscher′s ideas with those of his contemporaries, and analysing the reasons why plausible economic forecasts failed to anticipate the experience of the twentieth century.