Central Bank Interest Rate Policy as a Pro-Crisis Instrument of Macroeconomic Regulation

Why does interest rate policy not work in the economy as economic theory suggests?To understand why,you need to look at the economy from a higher level of abstraction.With this approach,only two states of the economy can be distinguished.The first is a“normal”state;the second is crisis and recession.The“normal”state is the period after the recession and before the next crisis.During this period,the basic laws of the market economy work.During a crisis,the relationship between the level of interest rates and borrowing by households and businesses is broken.This explains the ineffectiveness of the policy of lowering interest rates.Different states of the economy have their own laws,and you cannot extrapolate tools that are successful under“normal”market conditions linearly to the crisis state of the economy.Why does the interest rate policy during the period of the“normal”state of the economy not adjust its development in order to prevent the onset of the crisis?Firstly,the conditions for the emergence of crisis phenomena are created by the interest rate policy at the very beginning of the business cycle,when central banks set and maintain low interest rates for a relatively long period.Secondly,by the end of the business cycle,the credit burden in economy reaches its maximum,so there is no further possibility of expanding effective demand by decreasing interest rates.Thirdly,interest rate policy is an instrument for rough adjustment of the economy,indiscriminately affecting all participants in economic relations.In an attempt to stimulate the economy,the central bank creates the conditions for increasing its imbalance.Fourth,at the end of the business cycle,the interest rate policy does not actually support the real economy,but only the stock market.Fifth,the Fed’s policy has formed a pro-crisis conditioned reflex among market participants.Thus,central banks should leave the determination of the level of interest rates to the free market.

Economic uncertainty,central bank digital currency,and negative interest rate policy

The covID-19 outbreak has brought unprecedented social attention to economic uncertainty and negative interest rate policy(NIRP).How does uncertainty affect economic activity,and how effective is a NIRP based on central bank digital currency(CBDC)?To answer the two questions,we constructed a dynamic stochastic general equilibrium(DSGE)model that accommodates sticky prices and wages.The results indicated:(i)Economic uncertainty has substantially reduced investment,output,wage,and loans,which increases unemployment risk.In the short term,it has triggered impulsive consumption by households,while consumption has fallen into a slump in the long run.(ii)After suffering an uncertainty shock,the economy entered short-term stagflation and long-term deflation.The short-term stagflation was mainly caused by resident wage adjustment,and the long-term deflation was due to the decline in effective demand caused by unemployment risk.(ii)CBDC could eliminate the zero lower bound(ZLB)constraint,thereby improving the effectiveness of NIRP.Compared with traditional currency,CBDCbased NIRP could more effectively smooth macroeconomic fluctuations and alleviate the negative impact of an uncertainty shock,which is more conducive to restoring market confidence and promoting economic recovery.

Decline of oil prices and the negative interest rate policy in Japan

In April 2013,the Bank of Japan(BOJ)introduced an inflation target of 2%with the aim of overcoming deflation and achieving sustainable economic growth.But due to lower international oil prices it was unable to achieve this target and was forced to take further measures.Hence,in February 2016,the BOJ adopted a negative interest rate policy by massively increasing the money supply through the purchase of long-term Japanese government bonds(JGB).The BOJ had previously only purchased short-term government bonds,a policy that flattened the yield curve of JGBs.On the one hand,banks reduced the number of government bonds they purchased because short-term bond yields had become negative.The interest rates of long-term government bond up to 15 years even became negative.On the other hand,bank loans to corporates did not increase,due to Japanese economy’s vertical investment-saving(IS)curve.The purpose of this paper is to show that the monetary policy through implementation of the zero interest rate and more recently through the negative interest rate could not help the Japanese economy to recover from the long-lasting recession and these are not the remedy.It is of key importance to make the IS curve downward rather than vertical.That means the rate of return on investment must be positive and companies must be willing to invest even if interest rates are set too low.Japan’s long-term recession is due to structural problems that cannot be solved by its current monetary policy.The paper also explains why the BOJ has to reduce its 2%inflation target in the present low oil price era.

People's Bank of China Unveils Interest Rate Policy Reform

China’s central bank has unveiled its market-oriented proposals on interest rate policies. The People’s Bank of China said that China’s interest rate market reform would give priority to foreign currencies, rather than the Chinese currency. That means the day when the fluctuation of interest rates of foreign currencies will be liberalized would come before the floating of the Renmenbi rate.

Analysis of the Relation between Interest Rate Policy and the Stock Market in China

Based on the modern monetary theory, this paper analyze the relation between interest rate policy and Shanghai and Shenzhen Stock Exchange by using event study and co\|integration model method. We point out that the interest rate policy have some abnormal effects on the stock market in short time and have negative effects on the stock market in long run. The influence of the interest rate is different on Shanghai Stock Exchange and Shenzhen Stock Exchange.