Interest Rates Prices And Liquidity

"We assess recent developments in monetary policy practice following the .nancial crisis drawing on papers from a specially convened conference in March 2010. In particular, we consider why central banks throughout the world have injected substantial quantitites of liquidity into the .nancial system and seen their balance sheets expand to multiples of GDP. We outline the theoretical rationale for balance sheet operations: (i) portfolio balance of the non-bank .nancial sector; (ii) an o$set for the zero bound; (iii) signalling mechanism about medium term in.ation expectations and (iv) the alleviation of the government.s budget constraint. We brie.y outline the recent experience with QE and draw a distinction between liquidity and macroeconomic stabilisation operations"--

First published in 1960, Interest Rates and Asset Prices presents an analysis of the determination of interest rates and asset prices with the help of few simple assumptions. The theory can be regarded either as an alternative to the liquidity preference theory or as an extension of it. Like that theory, it is aggregative and simple, but it is applicable not only to interest rates on government securities but also to yields on real assets. Furthermore, it can be formulated in terms of actually measurable variables, so that it is directly applicable to particular situations. This is demonstrated by a statistical example relating to the average yield on U.S. Government securities in the post- war period. In addition to the main analysis the author discusses the role of financial intermediaries and the structure of interest rates, and there is also a re-examination of the determinants of the transactions demand for money. This is book is an essential read for students of economics.

Many of the assumptions that underpin mainstream macroeconomic models have been challenged as a result of the traumatic events of the recent financial crisis. Thus, until recently, it was widely agreed that although the stock of money had a role to play, in practice it could be ignored as long as we used short-term nominal interest rates as the instrument of policy because money and other credit markets would clear at the given policy rate. However, very early on in the financial crisis interest rates effectively hit zero percent and so central banks had to resort to a wholly new set of largely untested instruments to restore order, including quantitative easing and the purchase of toxic financial assets. This book brings together contributions from economists working in academia, financial markets and central banks to assess the effectiveness of these policy instruments and explore what lessons have so far been learned.

Liquidity refers to the degree to which an asset or security can be bought or sold in the market without affecting the asset's price. This book provides important evidence on the changes in market liquidity following the transition to electronic trading, and highlights quite different evidence from that presented in previous studies. Liquidity is also examined across different types of markets by using execution costs as a proxy for liquidity. The links between the concept of liquidity and the role of payment systems in a globalised financial system is investigated as well. Furthermore, a survey of both the theoretical and empirical literature related to the liquidity effect as well as a survey on the ability of the term spread to predict changes in economic activity is examined. The behaviour of long-term interest rates using time-series models is looked as well. Finally, the financial risk in life annuity and pension annuity as influenced by interest rate movements is discussed.

An important hurdle in analyzing interest rate targeting is that standard models usually lead to price level or inflation rate indeterminacy. This paper develops a simple framework in which such problems do not arise because the bonds whose interest rate is controlled provide liquidity services. This framework is used to examine interest rate targeting in a small open economy under predetermined exchange rates. A permanent increase in the interest rate has no real effects. In contrast, a temporary increase in the interest rate leads to higher consumption and to a current account deficit that worsens over time.

Much recent commentary suggests that global liquidity has influenced financial conditions in the major international markets to an important degree, and that excess liquidity in one financial center can influence financial conditions elsewhere. Little formal research has addressed these issues, however. In this paper, we use three indexes of liquidity (money growth) in the Group of Seven industrial countries to explore the international dimension of the relationship between liquidity and asset returns. Evidence suggests that an increase in G-7 liquidity is consistent with a decline in G-7 real interest rates and an increase in G-7 real stock returns. There is also evidence of liquidity spillovers across countries.

Much recent commentary suggests that global liquidity has influenced financial conditions in the major international markets to an important degree, and that excess liquidity in one financial center can influence financial conditions elsewhere. Little formal research has addressed these issues, however. In this paper, we use three indexes of liquidity (money growth) in the Group of Seven industrial countries to explore the international dimension of the relationship between liquidity and asset returns. Evidence suggests that an increase in G-7 liquidity is consistent with a decline in G-7 real interest rates and an increase in G-7 real stock returns. There is also evidence of liquidity spillovers across countries.