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 ...


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 ...


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 ...


4

The Fed funds rate is the rate at which commercial banks can borrow reserves on the overnight market (see this explanation at Investopedia). As such it affects all other interest rates banks charge since when they can borrow more cheaply they can also lend money cheaply to consumers. This affects among others also student loans (when they are provided by ...


3

$e^{-rt}$ 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 ...


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

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

One reason is that if the Finnish government borrowed more, then Finnish interest rates would rise, not just for the Finnish government, but also for other Finnish businesses. (This is just the old crowding-out effect, which applies whether or not rates are negative.)


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-...


3

Consider the life-time utility maximization problem of the individual. At this stage of the paper, while the utility function "has the usual regular indifference-curve concavities" as Samuelson writes, nothing has been assumed about the form of the intertemporal utility function, so the problem is stated as $$\max_{C_1,C_2,C_3}U(C_1,C_2,C_3),\;\;\; ...


3

Demand deposits might be cheaper, but they can disappear due to withdrawals. Banks also need stable sources of longer-term funding to match against their illiquid assets. Holding reserves is only of limited economic importance relative to the need to widen funding sources. CD’s are cheap relative to other sources of term funding. It would be very hard to ...


3

My impression as a non-economist is that there has not been much interest in the 21st century in these debates and it is not taught to students. This is misconception but understandable one (I will get to the understandable part at the end). According to The New Palgrave Dictionary of Economics (Becker, 2017) - leading source for economic terminology - ...


3

In theoretical literature LIBOR rate and central bank's rate (for example Fed's fund rate) are often used interchangeably (see many examples in Freixas and Rochet: Microeconomics of Banking). The reason why they are used interchangeably is that there is quite a strong proportional relationship between them and LIBOR rate depends on the Fed's fund rate. ...


2

The yield on government bonds is not necessarily equal to fed fund rate. Fed fund rate is a rate at which other banks can borrow from Fed. This being said the funds rate affects interest rates on all debts since if the banks can borrow more cheaply from Fed they can also offer better terms to their own creditors. Bonds compete on markets for loanable funds ...


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

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

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

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

"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

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

As asked, this question is too vague and open-ended. But the following statements seem safe. The effect of a fiscal stimulus is to raise growth and expected growth. All else equal, the central bank would be expected to raise interest rates, and inflation would be slightly higher, but still should remain near target (or else the central bank is going to have ...


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.


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

I am not sure about the institutional limitations on policies, but this is easily done in principle. Banks hold deposits at the Federal Reserve banks (reserves/excess reserves). If the Fed sets the interest rate on those deposits to a negative level, that pricing would ripple out everywhere. For example, assume the rate was -1%. Banks would buy Treasury ...


2

There is a market for inflation-linked bonds. The quoted yield on the bonds is the equivalent of a real yield, with the inflation rate corresponding to expected inflation. The real yields On US inflation-linked bonds are currently negative. Link to FRED data. There is no mystery to this. Nominal yields are effectively pinned to the expected path of the ...


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