Search results

The role of money and monetary policy of the central bank in pursuing macroeconomic stability has significantly changed over the period since the end of World War II. Globalization, liberalization, integration, and transition processes generally shaped the crucial milestones of the macroeconomic development and substantial features of economic policy and its framework in Europe. Policy-driven changes together with variety of exogenous shocks significantly affected the key features of macroeconomic environment on the European continent that fashioned the framework and design of monetary policies.

This chapter examines the key basis of the central bank’s monetary policy on its way to pursue and preserve the internal and external stability of the purchasing power of money. Substantial elements of the monetary policy like objectives and strategies are not only generally introduced but also critically discussed according to their accuracy, suitability, and reliability in the changing macroeconomic conditions. Brief overview of the Eurozone common monetary policy milestones and the past Eastern bloc countries’ experience with a variety of exchange rate regimes provides interesting empirical evidence on origins and implications of vital changes in the monetary policy conduction in Europe and the Eurozone.

Low interest rates around the world due to adaptive monetary policy regulations for some time a source of concern for the banking sector and depositors of the bank. In this environment, interest rates have raised concerns about nominal deposit interest rates which cannot be lowered below zero without destroying bank customers. Bank loans are becoming less vulnerable to lower interest rates on deposits approaching zero, indicating that the financial channel is weakened when interest rates are close to zero. Demographic pressures associated with longer life expectancy, China's gradual integration into global financial markets and changes in supply and asset requirements are attributed as reasons for low interest rates. Volatility of CPI inflation, interest rates on bank deposits attracting income tax and discontented depositors due to lower rates are cited as reasons for the suffering of bank depositors. This chapter thus discusses the impact of negative rate on economic growth and bank customers besides discussing the future trends of negative 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 purpose of this study is to examine the impact of interest rates on the size and the maturity choice of a syndicated bank loan. In addition, it attempts to determine the long‐run impact of a syndicated loan on the borrower's capital structure.

The paper uses a sample of 6,903 syndicated bank loans in the USA, covering the period 1984‐2004. First, all syndicated loans are categorized into two groups: loans in periods of increasing interest rates, and loans in periods of decreasing rates. Then, non‐parametric tests are performed to compare the characteristics of the two groups, including the proceeds from the loans, and robust regressions are used to examine the impact of the interest rates on the maturity choice. Finally, robust regressions are employed to examine the long‐run impact of the interest rates on the borrowers' leverage ratios.

On the whole, the results reject the market timing theory of capital structure for syndicated bank loans. Firms in the two groups borrow in similar amounts, and in the long run, the difference between the two groups' leverage ratios is statistically insignificant. On the other hand, firms tend to choose longer maturities when the interest rates are low compared to the rates two or three years ago.

To the best of the author's knowledge, this is the first study that links debt market conditions to the leverage ratios of firms that borrow in the syndicated bank loan market. In other words, this is the first study that tests the market timing theory of capital structure for syndicated bank loans.

Many associations in the Farm Credit System, which are financial cooperatives, pay their member‐borrowers a cash patronage payment based on the amount of loan volume with the association. In today's competitive lending environment, some Farm Credit associations have offered lower interest rates on new loans but these new member‐borrowers have to forgo their cash patronage payment to receive this new, lower‐interest rate loan. The purpose of this paper is to identify Farm Credit member‐borrowers' preferences for patronage refunds received as a cash payment versus lower fixed real estate interest rates.

Preferences for patronage refunds or lower fixed interest rates are elicited from Farm Credit Services of East Central Oklahoma member‐borrowers via conjoint analysis.

Results show that member‐borrowers strongly prefer patronage refunds compared to lower fixed interest rates.

This paper fulfills a need to better understand patronage refund programs within the Farm Credit System.

Over the past two decades, institutions that make microloans to low-income borrowers in developing and transition economies have focused increasingly on making their lending operations financially sustainable by charging interest rates that are high enough to cover all their costs. They argue that doing so will best ensure the permanence and expansion of the services they provide. Sustainable (i.e., profitable) microfinance providers can continue to serve their clients without needing ongoing infusions of subsidies and can fund exponential growth of services for new clients by tapping commercial sources, including deposits from the public.

Current US tax laws provide investors an incentive to time the sales of their bonds to minimize tax liability. This gives rise to a tax-timing option that affects bond value. In reality, corporate bond investors’ tax-timing strategy is complicated by risk of default. Existing term structure models have ignored the effect of the tax-timing option, and how much corporate bond value is due to the tax-timing option is unknown. In this chapter, we assess the effects of taxes and stochastic interest rates on the timing option value and equilibrium price of corporate bonds by considering discount and premium amortization, multiple trading dates, transaction costs, and changes in the level and volatility of interest rates. We find that the value of the tax-timing option accounts for a substantial proportion of corporate bond price even when interest rate volatility is low. Ignoring the timing option value results in overestimation of credit spread, and underestimation of default probability and the marginal investor’s income tax rate. These estimation biases generally increase with bond maturity and credit risk.