Real Interest Rates

Compare and contrast interest rate parity (IRP), purchasing power parity (PPP), and the international Fisher effect (IFE).
1. Based on PPP theory, what is a general forecast of the values of currencies in countries with high inflation?
2. How is it possible for PPP to hold if the IFE does not? (Benedictine, n.d.).
Forward rates for currencies are determined by the market forces of supply and demand.  “In some cases, the forward rate may be priced at a level that allows investors to engage in arbitrage.  Their actions will affect the volume of orders for forward purchases or forward sales of a particular currency, which in turn will affect the equilibrium forward rate.  Arbitrage will continue until the forward rate is aligned where it should be, and at that point arbitrage will no longer be feasible” (Madura, 2012, p. 216). When arbitrage no longer is feasible; IRP (Interest Rate Parity) exists between the two countries whose currencies are being exchanged.  “In equilibrium, the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between the two currencies” (Madura, 2012, p. 220).

This is the first in a series of seven papers on interest rates and it covers the basic terms and information required for a fuller understanding of the significance of interest rates: the instruments that interest rates apply to, the bank interest margin which plays an important transmission role in monetary policy, time value of money, types, relationship between rates and prices, and other relevant issues. The seven papers cover: (1) what are interest rates?; (2) relationship of interest rates; (3) composition of interest rates; (4) interest rate discovery; (5) bank liquidity & interest rate discovery; (6) role of interest rates; (7) an optimal rate of interest: the natural rate.

This study examines the impact of interest rate on economic growth in Nigeria using annual time series data spanning 1980 to 2017. This phenomenon is particularly interesting from a theoretical standpoint as well as for the understanding of financial market mechanisms. The Vector Autoregression (VAR) model and the Granger causality test are employed to estimate the model coefficients and measure the causal relationship among the concerned variables. From the VAR-based impulse response function and its corresponding variance decomposition estimates, result shows the existence of negative relationship between interest rate and economic growth in Nigeria. In addition, the Granger causality test indicates the presence of bi-directional causal relationship between interest rate and economic growth. Consequently, monetary authorities should designed and implement interest rate policies that enhance investment and take into cognisance other elements that retard investment progression. To attain the desired growth level in Nigeria, monetary authorities and policy makers should adopt policy measures that are growth oriented and have the potentials to accelerate the economy to higher productivity and sustainable economic growth.

This is the fifth in a series of seven papers on interest rates and it covers the monetary policy models, a bank liquidity analysis, the concept of quantitative easing in terms of a bank liquidity analysis, and how a QE policy affects interest rates. The seven papers cover: (1) what are interest rates?; (2) relationship of interest rates; (3) composition of interest rates; (4) interest rate discovery; (5) bank liquidity & interest rate discovery; (6) role of interest rates; (7) an optimal rate of interest: the natural rate.

The Brazilian equity market is characterized by relatively low liquidity, high cost of capital (low firm valuation), and limited new capital raising. Ownership concentration of corporations is high, with large wedges between control and cash flow rights, leading to large differences in pricing of non-voting and voting shares, reflecting the risks of expropriation by insiders. In recent years, much of

This paper offers a theoretical discussion of the price elasticity of supply. While there have been a number of attempts to estimate the responsiveness of UK supply, relatively little has
been written on what determines it. A key omission is the effect of long-term real interest rates. Steep falls in both the annual rent to house price ratio and long real interest rates during a period of relatively static real rents in the UK suggest that the stream of future imputed rents became discounted at successively lower interest rates between 1996 and 2007. New supply responded sluggishly to price rises during this period, but then collapsed rapidly as the market turned in 2008. This paper argues that the decline in long-term real interest rates contributed to rising house prices and the inelastic supply response during the long upswing, and that cyclical asymmetries inherent in the supply response have been exacerbated by changes in the financial system and increased government regulation of the planning process.

This is the sixth in a series of seven papers on interest rates and it covers the various roles of interest rates: primary tool of monetary policy, bridge between present and future consumption, advancing consumption / investment with debt, interest rates’ inverse relationship with asset prices and the wealth effect, the role of interest rates in derivative instrument pricing, and interest rates’ role in foreign sector issues. The seven papers cover: (1) what are interest rates?; (2) relationship of interest rates; (3) composition of interest rates; (4) interest rate discovery; (5) bank liquidity & interest rate discovery; (6) role of interest rates; (7) an optimal rate of interest: the natural rate.

The effects of the recent global economic crises on Nigeria’s economy have reaffirmed the urgent
need for economic diversification in the country. Although no country is immune to such global
crises, the over reliance on oil export revenue by Nigeria expose her economy excessively to
external shocks. Therefore, this research examines the impact of aggregate non-oil sector and its
determinant on economic growth. The bound test approach was explored to examine the long and
short run effects of the non-oil export and its ensuing determinants. The result reveals a significant
effect of non-oil export on economic growth in both the long and short run. Policies aimed at
boosting the level and significance of the nonoil export were proposed.

This is the second in a series of seven papers on interest rates and it covers the relationship between the policy interest rate and the banks’ prime lending rate; the many, but related, interest rates on debt and deposits; the interbank market interest rates; and the relationship of money market interest rates. The seven papers cover: (1) what are interest rates?; (2) relationship of interest rates; (3) composition of interest rates; (4) interest rate discovery; (5) bank liquidity & interest rate discovery; (6) role of interest rates; (7) an optimal rate of interest: the natural rate.

Per la BCE i rincari sono «effetti temporanei» o comunque non preoccupanti. La realtà è parecchio diversa. La paventata ripresa dell'inflazione in Italia è legata in particolare ai fortissimi rialzi delle materie prime energetiche, con rincari a doppia cifra delle bollette di gas e luce, e si è estesa inevitabilmente anche ai prezzi del carrello della spesa: negli ultimi mesi, il tasso annuo di inflazione è balzato verso il 7% negli Stati Uniti d'America, sui massimi dal 1982, e al 5% nell'area euro, sui massimi dal 2008. Che cosa sta accadendo? Tra le cause remote dei rialzi dei prezzi si possono sicuramente indicare le politiche monetarie ultra-espansive adottate dalle Banche centrali. Dalla «Grande crisi finanziaria» del 2007-2009 le autorità monetarie mondiali hanno inondato i mercati di enormi flussi di liquidità creata ex nihilo - in ulteriore fortissima accelerazione dopo la crisi del CoViD-19 -, mantenendo compressi i tassi nominali di rendimento dei titoli governativi e perseguendo con accanimento il rialzo dell'inflazione, in modo da "svalutare" nel tempo, in termini reali, i debiti pubblici e privati fuori controllo. Tra le cause prossime del rincaro vi sono le politiche fiscali espansive attuate dai governi per fronteggiare la crisi economica indotta dai lockdown generalizzati, che hanno provocato la frammentazione delle filiere produttive e distributive, con sensibili restrizioni e strozzature dal lato dell'offerta, anche sulle forniture energetiche, con ovvie conseguenze sui prezzi. Il Green New Deal, poi, chiude il cerchio.

This paper develops two scenarios, as part of a proposal that seeks to support decision making, given the notorious absence of financial literacy that have been referenced by institutions like the World Bank (2014; 2015) and the Mexican Ministry of Finance and Public Credit (SHCP, 2013), among others. This proposal is a scheme of advance annuities and a scheme of annuities with arithmetic gradient; all of them with the same interest rate and an equal number of payments. The results allowed observing different increments generated by each of the scenarios, in terms of interest generated. The best choice or at least the most attractive is an investment fund based on a scheme of annuities with arithmetic gradient which generates more profits.

The Brazilian equity market is characterized by relatively low liquidity, high cost of capital (low firm valuation), and limited new capital raising. Ownership concentration of corporations is high, with large wedges between control and cash flow rights, leading to large differences in pricing of non-voting and voting shares, reflecting the risks of expropriation by insiders. In recent years, much of

This is the third in a series of seven papers on interest rates and it covers the yield curve, the literature on the composition of interest rates, an alternative analysis of composition of interest rates, the literature on the risk-free rate, an alternative view of the risk-free rate, and an analysis of the relationship of interest rates. The seven papers cover: (1) what are interest rates?; (2) relationship of interest rates; (3) composition of interest rates; (4) interest rate discovery; (5) bank liquidity & interest rate discovery; (6) role of interest rates; (7) an optimal rate of interest: the natural rate.

This is the fourth in a series of seven papers on interest rates and it covers the principle of interest rate discovery and security valuation, the micro structure of financial markets, the role of secondary markets, interest rate discovery in the debt and deposit markets, and the micro factors which impact on price discovery. The seven papers cover: (1) what are interest rates?; (2) relationship of interest rates; (3) composition of interest rates; (4) interest rate discovery; (5) bank liquidity & interest rate discovery; (6) role of interest rates; (7) an optimal rate of interest: the natural rate.

Economic theory suggests that national savings is an important component of growth in every economy. In developing countries like Pakistan that is performing well in terms of growth, one cannot rule out the fact that savings has got a role to play. The most significant economic relation between present, past and future of any country is described by its savings. The aim of this study was to analyze the impact and relationship between national saving rate and some selected determinants of saving namely inflation, real interest rate, real GDP growth rate and Government current expenditure, by using annual data for the period of 1980-2010. The variables in our model are based on well-established economic theory and long standing relationship. Supplemented in a dynamic regression model with the ARMA specification and well specified model; it was found that inflation, interest rate and government expenditures are negatively affecting the national savings rate during the length of this study for the economy of Pakistan.

The interest rate is the chief target of monetary policy, and central banks have the ability to control short-term interest rates to the extent of almost 100%. Longer-term interest rates are anchored in short-term rates. The principal interest rate targeted is the banks’ prime lending rate (PR) (which is a benchmark rate, ie all bank lending rates are referenced on PR). Why? Because new bank lending is the counterpart of money creation, and bank lending / money creation is a reflection of nominal GDP growth (government, companies and individuals borrow to undertake additional expenditure / investment). The purpose on monetary policy is to influence, via PR, the borrowers’ borrowing behaviour – the demand for credit. How do central banks control PR? They do so by setting their own lending rate to the banks, the policy interest rate (PIR), and by forcing the banks to borrow from the central bank at the PIR – or threatening to force the banks to borrow from it at the PIR. The PIR heavily influences market interest rates and ultimately the PR, and therefore the demand for credit.

This is the seventh in a series of seven papers on interest rates and it covers the Wicksell hypothesis, the general interpretation of it, an alternative interpretation, how the alternative interpretation is reconciled with the general interpretation, and its fit with the Taylor rule. A modification to the Taylor rule is discussed. The seven papers cover: (1) what are interest rates?; (2) relationship of interest rates; (3) composition of interest rates; (4) interest rate discovery; (5) bank liquidity & interest rate discovery; (6) role of interest rates; (7) an optimal rate of interest: the natural rate.