COVID-19, Liquidity, and the New Debt Structures
Friday, Jan. 7, 2022 10:00 AM - 12:00 PM (EST)
- Chair: L. Randall Wray, Levy Institute and Bard College
The Evolution of Monetary Policy Focal Points
AbstractWith near-zero policy rates becoming the norm in many advanced economies, the focus on long-term bond yields has strengthened considerably. The unconventional monetary policy decision by the Bank of Japan (BOJ) in September 2016 to explicitly target the 10-year Japanese government bond (JGB) yield institutionalised this process – by effectively creating a new monetary policy focal point. In this paper, we study the importance of such focal points. Empirically, we also investigate how JGB benchmark maturities ranging from 1 to 30 years has affected other benchmark maturities over time. We find that the 10-year bond, indeed, became more influential in 2016. However, the effect was surprisingly short-lived. The results suggest that once financial market participants anchored their expectations of the 10-year JGB yield to the new BOJ target, the attention merely shifted towards even longer maturities. Contrary to the logic of the monetary transmission mechanism, we also find the short end of the yield curve has been an absorber, rather than transmitter, of influence during the last decades.
Keynesian Models of the Long-Term Interest Rate
AbstractThere are several widely used benchmark models of the long-term interest rate in quantitative finance. However, these models are yet to incorporate Keynes’s valuable insights about interest rate dynamics. The Keynesian approach to interest rate dynamics can be readily incorporated in the benchmark models of the long-term interest rate. This paper modifies several benchmark interest rate models. In these modified models the long-term interest rate is related to the short-term interest rate and a Wiener process. The Keynesian approach to interest rate dynamics can be useful in addressing theoretical and policy issues.
Could transaction-based financial benchmarks be susceptible to collusive behaviour?
AbstractPrior to the series of manipulation scandals, financial market benchmarks were perceived as a competitive and objective reflection of underlying money markets (Stenfors and Lindo 2018). For example, the manipulation of the London Interbank Offered Rate (Libor), underpinning financial contracts worth trillions of dollars was unthinkable. To prevent manipulation, financial market regulators around the world have recommended a paradigm shift from estimation-based to transaction-based financial market benchmarks. This shift is based on the mainstream economic view that financial market benchmarks anchored on actual transactions are not susceptible to anticompetitive behaviour. However, unlike auction markets, underlying interbank money markets have unique features. As most activity takes place over-the-counter, they are opaque and are governed by conventions, trust and reciprocity. This complicates the achievement of competitive pricing. Using a novel dataset from Bank of Zambia, this paper makes an empirical investigation into transaction-based benchmarks’ susceptibility to anticompetitive behaviour. Additionally, it contributes to the theoretical understanding of transaction-based financial market benchmarks. The study reflects on financial market regulators’ recommendation to transit from estimation-based to transaction-based financial market benchmarks. Further, the study is of interest to central bankers, as short-term interbank rates are the first stage of the monetary transmission mechanism.
Banks during the Pandemic: A Japanese Perspective
AbstractIn recent years, Japanese banks have revived their leading international role in the provision of global liquidity. Since the start of the pandemic of Covid-19, Japanese banks have increased their overseas lending at a much higher pace. This paper examines the drivers behind the surge in such activities by taking into account factors that characterise the domestic economy as well as bank level variables. The analysis will also aim to examine the impact of the government response, by means of introducing a number of unconventional measures to counter the adverse effect of the pandemic, on the activities of the banking sector. Preliminary findings suggest that Japanese banks have seen a surge in the deposits held and at the same time a decline in loans outstanding. Data from the Senior Loan Officer Opinion Survey on Bank Lending Practices at Large Japanese Banks, reveals that the demand from all size firms has declined since mid-2020. Faced with ongoing low domestic profit opportunities and higher regulatory requirements, Japanese banks have continued their overseas activities and in particular they have increased their exposure to offshore financial centres.
The Yield Curve and the Capital Market in Japan
AbstractThe paper looks at Japanese yield curve control policy and its effects on capital allocation through the financial system. The paper argues that loose monetary policy during the Covid shock is increasing the over-capitalisation of corporates. In turn this reveals how capital market inflation is unable to restart private sector investment.
- E4 - Money and Interest Rates
- G0 - General