Liquidity effects and the determinants of short-term interest rates in Italy (1991-92). by Ignazio Angeloni

Cover of: Liquidity effects and the determinants of short-term interest rates in Italy (1991-92). | Ignazio Angeloni

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SeriesTemi di discussione -- no.141
ContributionsPrati, Alessandro.
ID Numbers
Open LibraryOL21516852M

Download Liquidity effects and the determinants of short-term interest rates in Italy (1991-92).

Liquidity Effects and the Determinants of Short-term Interest Rates in Italy () The paper uses Italian daily data from January to July (a period in which the lira belonged to the narrow EMS band without foreign exchange controls) to measure the relationship between liquidity and interest rates.

Add tags for "Liquidity effects and the determinants of short-term interest rates in Italy". Be the first. Angelini, I. & Prati, A., "Liquidity Effects and the Determinants of Short-Term Interest Rates in Italy," PapersBanca Italia - Servizio di Liquidity Effects and the Determinants of Short-term Interest Rates in Italy () to measure the relationship between liquidity and interest rates.

The high quality of the data allows us to separate that part of interest rate variability due to foreign exchange factors (i.e. interest rate linkages in the EMS) from that attributable to Author: Ignazio Angeloni and Alessandro Prati. Employing a comprehensive database on transactions of commercial paper issued by domestic U.S.

nonfinancial corporations, we study the determinants of very short‐term corporate yield spreads. We find that liquidity plays a role in the determination of spreads but, somewhat surprisingly, credit quality is the more important determinant of spreads, even at horizons of less than 1 month.

As far as the determinants of short-term interest rates are concerned, the basic question in this dissertation is whether they are determined by market forces or as a policy variable.

If market forces determine short-term interest rates, then it is necessary to explore the dynamics of the supply of and demand for money in the financial markets.

Firstly, the phenomenon of negative forward nominal interest rates has been demonstrated as a result of this liquidity premium, and secondly, as would be expected, the amount of time remaining as a liquid asset is important to the magnitude of the liquidity premium component of the asset by: 7.

A significant difference in terms of the diagnosed flexibility is the effect of the weighted average interest rates of the unsecured market of interbank O/N deposits on the level of banks liquidity.

JOURNAL OF ECONOMIC THE () Liquidity and Interest Rates* ROBERT E. LUCAS, JR. Department of Economics, University of Chicago, Chicago, Illinois Received Septem ; revised April 5, This paper analyzes a series of models in which money is required for asset transactions as well as for transactions in by: liquidity effect in its simplest form.

In this example, inflation and liquidity effects determine the interest rate on one period bonds. Section 3 introduces a more general formulation that can accommodate a wide variety of bonds and other securities.

Section 4 then specializes to the case in which shocks. Liquidity effect, in economics, refers broadly to how increases or decreases in the availability of money influence interest rates and consumer spending, as well as investments and price stability. The Federal Reserve, the main body that controls the availability of money in the United States, employs mechanisms such as changes in the amount of money banks keep in reserve and the sale or purchase of Treasury.

imply that the level of long-term domestic interest rates are determined by several factors, namely the foreign interest rate, the default risk premium, the currency premium, as well as the effects of remaining capital controls and other effects of imperfect asset substitution.

While foreign interest rates (say U.S. rates on government bonds) con. THE FUNDAMENTAL DETERMINANTS OF THE INTEREST RATE Martin Feldstein and Otto Eckstein This paper assesses the fundamental deter-minants of changes in the long-term interest rate.

Most recent studies of bond rates have emphasized the term structure relations be-tween the bond rate and short-term interest rates.1 Although we recognize that the indi.

MRP risk mainly arises because of the interest rate risk, which is the risk that the market value of the investors' investment changes with changes in interest rates. As a general rule, the bonds of any organization have more interest rate risk the longer the maturity of the bond.

Central bank forecasts of liquidity factors and the control of short term interest rates 15 As indicated in the Table, the Federal Reserve System publishes, in contrast to the ECB and the Bank of Japan, directly its overnight interest rate target.

As will become clearer later in the paper, this can. liquidity which would depend on availability of cash and near cash in relation to general demand for goods / assets. The trends in monetary liquidity would generally get reflected in short-term interest rates; low short term rates signifying easy liquidity.i This concept of liquidity is commonly talked about and commented upon.

Cash is commonly accepted as the most liquid asset. According to the liquidity preference theory, interest rates on short-term securities are lower because investors are not sacrificing liquidity.

The Effect of Monetary Policy on Short-TermInterest Rates HE “liquidity effect” plays a central role in Keynesian theory ofthe transmission of monetary policy.

It is based on the notion that the demand for money is negatively related to the nominal interest rate. 1 Other things the same, an exogenous increase in the money stock depresses.

The natural rate of interest. The falling trend in yields can be interpreted as a decline in the so-called natural or neutral rate of interest (labelled as r* in academic research and policy discussions).

The natural rate of interest corresponds to the level of the real short-term interest rate that defines a neutral policy stance: this corresponds to a situation in which the economy is.

Determinants of Long-Term Interest Rates: An Empirical Study of Several Industrial Countries Author: Howard Howe and Charles Pigott Subject: Interest rates Keywords: Real interest rates, Japan, Germany, United Kingdom, France, United States, macroeconomic policy, monetary policy, equilibria, Wicksellian framework, equilibrium, government debt.

determinants of the money rate of interest remain essentially the same: (i) the rate of profit (or the natural rate), (ii) fluctuations in demand for loanable funds vis-à-vis supply, and (iii) the rate of inflation (either because of the.

By analysing the balance sheet of a small Italian bank during the years andwe outlined its liquidity profile, the variables that influenced its dynamics and their effects on the bank’s global management, with particular attention to the interest margin and the interest rate risk in the banking by: 3.

Determinants of interest rates. One of the major determinants of interest rates is the monetary policy conducted by the Reserve Bank of Australia or RBA. The RBA is the central bank of Australia whereby its role is to stabilise its currency and also to conduct the monetary policy (Reserve Bank of Australia, ).

The comparison of the effects of the liquidity level and liquidity risk is reminiscent of the debate on the role of factor betas versus characteristics such as size and book-to-market in the cross-section of equity returns.

7 We thus follow Daniel, Titman, and Wei (), who study the pricing of characteristics and betas in the equity market Cited by: Determinants of Interest Rate Pass-Through: Do Macroeconomic Conditions and Financial Market Structure Matter. Prepared by Nikoloz Gigineishvili1 Authorized for distribution by Johannes Mueller July Abstract Numerous empirical studies have found that the strength of the interest rate pass-through varies markedly across countries and Size: 1MB.

2 thoughts on “ Liquidity and Interest Rates ” M.H. 18 March, at “Rather than paying the lender more, the borrower might instead opt to offer offsetting terms: the lender reserves the right to liquidate the loan — ask for the borrower to return the principle, plus whatever interest has accrued up to that point in time —, but only if s(he) agrees to reduce the rate of.

Especially, they find significant differences in the long term and short term debt determinants. Morellec () argues that the effect of asset liquidity on capital structure is negative or curvilinear.

This paper investigates the effect that asset liquidity has on securities valuation. This is “The Determinants of Interest Rates II: The Term Structure”, section from the book Finance, Banking, and Money (v.

For details on it (including licensing), click here. This book is licensed under a Creative Commons by-nc-sa license. Liquidity Effects and the Determinants of Short-Term Interest Rates in Italy Working Papers, Banca Italia - Servizio di Studi View citations (3) Liquidity Effects and the Determinants of Short-term Interest Rates in Italy () CEPR Discussion Papers, C.E.P.R.

Discussion Papers View citations (2) Signalling Debt Sustainability. Many factors may be effect of stock market liquidity: such as market capitalization, trading size, number of trading, leverage variable, size of firm, profitability.

So, these factors. In finance, the yield curve is a curve showing several yields to maturity or interest rates across different contract lengths (2 month, 2 year, 20 year, etc. ) for a similar debt contract. The curve shows the relation between the (level of the) interest rate (or cost of borrowing) and the time to maturity, known as the "term", of the debt for a given borrower in a given currency.

A) the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a liquidity premium.

B) buyers of bonds may prefer bonds of one maturity over another, yet interest rates on bonds of. determinants of the so-called “commonality liquidity” in the corporate bond market in the US, covering a period of seven years, from This topic has not yet been explored in the current financial science : Arbnesha Istrefaj.

Interest rate risk is the potential that a change in overall interest rates will reduce the value of a bond or other fixed-rate investment: As interest rates rise bond prices fall, and vice versa.

This paper examines the effects of liquidity on interest rate option prices. Using daily bid and ask prices of euro (€) interest rate caps and floors, we find that illiquid options trade at higher prices relative to liquid options, controlling for other effects, implying a liquidity discount.

This effect. I am currently reading Alvarez, Lucas, Weber () where the authors argue that changes in money supply is more important for affecting inflation, than changes in the interest rate. However, I am confused about this part: To be useful in thinking about the role of interest rates and open market operations in the control of inflation, a model of monetary equilibrium needs to deal with the fact.

ratio and real long-term interest rates in linear specifications. Quadratic specifications yield a U-curve structure in explaining the association between debt ratios and the real long-term yields, supporting evidence for a positive association once the debt ratio surpasses a threshold in the range of %.

Keynes’s monetary theory of interest Geoff Tily1 Keynes, bank money, liquidity preference, long-term rate of interest, debt management policy, tap issue, capital control, international clearing union meant that the short-term rate of interest was freed from its role in preserving the exchangeCited by: 6.

in short-term secu-rities, which makes them more risky for the investor. The question re-mains, if each in-terest rate change causes the same impact on capital market and whether the prices of shares and bonds respond with the same le-vel of sensitivity.

The developed capital markets show that changes in short-term interest rates are reflectedFile Size: 98KB. 1 The Determinants and Pricing of Liquidity Commonality Around the World1 Fariborz Moshirian a,b, cXiaolin Qian, Claudia Koon Ghee Weeand Bohui Zhang a Institute of Global Finance, UNSW Business School, The University of New South Wales, Sydney NSW Australia.

b School of Banking & Finance, UNSW Business School, The University of New South Wales, Sydney NSW by:. Daniel L. Thornton investigates the responsiveness of interest rates to changes in monetary policy.

Analysts often argue, Thornton notes, that changes in monetary policy initially affect the economy through a “liquidity effect” on interest rates. For example, an expansionary monetary policy is said to depress market interest rates initially.According to the liquidity premium theory of interest rates A) Long term spot rates are higher than the average of current and expected future short term rates.

B) Investors prefer certain maturities and will not normally switch out of those maturities. C) Investors are indifferent between different maturities if the long term spot rates are equal to the average of current and expected.Determinants of Short-Term Nominal Interest Rates Yash P. Mehra Many previous studies cannot account for the high level of interest rates in the early s.

For example, Clarida and Friedman (, ) demonstrate that relative to the predictions of either a struc-tural or an astructural model, interest rates in the early s were too high.

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