27

Some pictures and text are from Schroders, Marketwatch and other websites, but I don't remember all them. Of note, Germany first sold negative-yielding bonds in Aug 2019, €2bn worth of 30-year bonds that offer no interest payments at all. 1. Better than holding cash Cash is obviously most liquid, but some central banks like Japan impose negative interest ...


14

The low interest rate will be in a different currency. If your domestic currency falls in value, the value of the mortgage in terms of the domestic currency goes up. Entities borrowing in a foreign currency and then running into difficulties is a standard features of financial crises over history.


14

What does stop me from taking a loan from a bank in a rich EU-country to build or buy a house in a poor country like Russia, while having EU-level interest rates below 3% instead of the Russian 15%? Other answers have already mentioned the currency risk you would have. Further limitation is that most European banks won't give you a loan at 3% interest for ...


11

Actually they're saying that, when cash is available, people need not to deposit their money into the bank, and hence is "guaranteed" (not taking into account risks associated with holding on to cash, like fire or getting stolen) a 0% interest rate. Having cash, therefore, means that if the deposit rate goes into the negative territory (you're charged to ...


7

There are several reasons why it makes still sense. Nominal negative return does not mean that real return is negative. There is a difference between nominal interest rates and real interest rates which can be expressed by the Fisher formula: $$ i \approx r + \pi$$ Where, $i$ is the nominal interest rate, $r$ is the real interest rate and $\pi$ is ...


6

A private person will almost never have an access to borrowing at risk free rate. However, governments such as Germany or Switzerland can borrow at essentially for all practical purposes at risk free rate by issuing government bonds. As a private person you might get access to risk free loan if you are rich enough to be able to negotiate the rate with bank ...


4

I agree with @BrianRomanchuk's +1 answer but I would like to expand on it to give you some more intuition why that holds. According to a simple monetary model of exchange rates, the exchange rate between two currencies (here Euro and Russian Ruble) is given by: $$S = (m - m^*) -\psi( y - y^* ) + \lambda (i - i^*)$$ where $m$ is the log of money supply, $y$...


4

You are right the two series closely follow each other for the reasons you mention. During quite some time the discount rate actually used to be a ceiling for a funds rate. This is precisely, because if the federal funds rate was below the discount rate, most banks adjusted their reserve positions in the federal funds market and when the federal funds rate ...


4

In the US, a fail penalty is applied on the failure to deliver securities in a US Treasury or Agency transaction. This applies to any trade in these securities , including a simple cash trade , or the opening leg of a repo, or the closing leg of a repo. The intent of the system , first introduced in 2012, was to clean up fails in the Marketplace by ...


3

Some of your equations are wrong and you need to account for the time value of money correctly in some places. It might be useful to write down a timeline and make sure to bring all payments to the same point in time (let's take time 0 as our reference) Therefore, what you receive should have the same present value to what you pay (I'll use American ...


3

Generally speaking, a risk-free rate refers to the yield you get on a government bond (read more here). On a checking account there's a possibility that the bank would fail. Yes, it's FDIC insured, but up to \$250K.


3

Instead of looking at bitcoin like a currency, I think you should look at it like a regular stock. The "return" is the return of your fiat money (USD) that's investing in Bitcoin... so the risk free rate should be the risk free rate of your money, i.e. T-bill, etc.


3

Fractional banking acts as a multiplier on the money available for loan takers. Actually, this is subsequently to having taken loans that the money multiplier increases from 1. Fractional banking potentially increases the "money supply", it does not do so performatively. Incidentally this is even why, western economists are currently discussing the ...


3

While there certainly is some inflationary pressure from these measures, it seems like the missing demand and investment as well as the decrease in investments from both households and firms is offsetting this effect entirely. However, this might change in the long run, when the lockdowns will be lifted. Some authors argue that we will be facing a strong ...


3

This question cannot easily be answered. If we look at historical societies, bond markets appeared in eras where was a central bank, most importantly, the Bank of England. During the Gold Standard, notes were not 100% gold backed. If we look at earlier eras, customs were very specific to a culture. For example, there were eras which were largely non-...


2

In short, the belief this reflects is that cheap money is spent more freely. Since GDP counts the sum-total of value-added transactions in the economy, in principle this means that monetary policy affecting the velocity of money can in turn affect GDP. Theoretically, this is valid to the extent that debt-servicing costs are a significant friction in the ...


2

Simply because buying country A's currency priced in country B's currency means selling country B's currency. Simplified but not simplistic example: say that you have 80¥ and want to buy 10€. When buying/demanding these 10€, you will actually simultaneoualy also sell 80¥ i.e. by doing so you become a supplier of (€-priced) yuans. And because selling an ...


2

Imagine an economy with only one good, tomatoes, and three people, Lender, Borrower, and Owner. Owner owns all tomatoes. Lender owns all the money. And Borrower owns nothing. If Lender doesn't lend any money to Borrower and Lender doesn't purchase any tomatoes, the price of tomatoes is 0 as there is no demand. When Lender loans Borrower some money and ...


2

There are many channels of monetary policy transmission. You could look that up more if you're interested. I'll point out some of them here. Interest rate channel. This is pretty much what you mentioned in the question. The opportunity costs of borrowing money becomes cheaper, so private demand expands. Asset price channel. With the lower rate, people find ...


2

Can the inflation rate rise even if the interest rates are below 0%? In short, yes. The inflation rate rises when more money chases goods and services than before. This can happen because there is more money circulating less goods and services output money is circulating at a faster pace (increased money velocity) money is chasing a narrower set of goods ...


2

However will that not in turn cause the bond prices to drop Low yields provide incentives for people to sell bonds in exchange for cash. And they do. However, bond prices will not drop if there is a counter-acting amount of buying. Who is that buyer? The various central banks that are causing the liquidity trap in the first place. If that sounds counter-...


2

"Vault cash" is the money that a bank will keep on premises (which is usually kept in their vault) to deal with their day-to-day cash needs. The bank must have a certain amount of cash on hand in order to deal with these types of every day transactions. "vault cash" is considered to be part of a bank's reserves, and banks will usually be required to have ...


2

Mankiw makes the Big Assumption that total output $Y$ is fixed. Informally and intuitively, we can imagine this as arising because everything is running at full capacity. Factories and workers are working as long and as hard as they can. So, every \$100 increase in consumption (e.g. production of bread, clothing) can only possibly occur with a corresponding ...


2

This is because investment is equal to private and public savings (but assuming balanced budget public saving drops out so it would only be private savings I=S). This is because you can only invest what you save. Moreover saving and consumption are mutually exclusive. From your income you can either consume or save there is no third option economically ...


2

It creates losses. First, many businesses don’t own their own building/land/equipment. It’s very common to lease these things. Moreover, many business take out insurance that again has to be paid on monthly basis. In Europe in many countries you need to pay workers certain portion of wages even when you can’t call worker to work or even if they stay home ...


2

Keep in mind that nominal interest rate=Profit/Initial Amount. The exact relationship that links real interest rate, nominal interest rate and inflation is $(1+R_{nominal})=(1+R_{real})(1+\pi)$ where $\pi$ is the inflation rate (Known as Fisher's identity) $R_{nominal}=R_{real}+\pi$ is an approximation that works best when those variables are relatively ...


2

The sentence: Therefore, the central bank controls interest rates in both ways to keep inflation close to its target rate. does not make sense to me, and I am having a difficult time parsing the three suggested alternatives. (“Money over/under-valued” does not appear to make sense, since the value of money is always 1.) In most cases, a central bank has ...


2

One standard way of determining the fair value of a bond yield (for a country that controls the currency it borrows in) is to say that it is the sum of two factors. The expected (Geometric) average of the overnight rate (that is set by the central bank) over the life of the bond. This equals the expected return of holding money market instruments instead of ...


2

$e^{-rt}$ is the continuous discounting factor while $(1 + r)^{-t}$ is its discrete counterpart. Identically/equivalently, there is the continuous manner of computing factors of variation, e.g. $1 + \ln \frac{x_{0+t}}{x_0}$, and its discrete counterpart $\frac{x_{0+t}}{x_0}$. It all depends on whether you think you are dealing with a continuous quantity or ...


2

It is exceedingly rare for commentators to discuss the discount rate. As such, referring to “rate cuts” typically refers to Fed Funds. In any event, under normal circumstances, the discount rate is kept at a constant spread to the Fed Funds rate, so they move at the same time.


Only top voted, non community-wiki answers of a minimum length are eligible