Shocking Interest Rate Floors Shocking Interest Rate Floors Fabio - - PowerPoint PPT Presentation

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Shocking Interest Rate Floors Shocking Interest Rate Floors

Fabio Canetg Fabio Canetg U Bern U Bern Daniel Kaufmann Daniel Kaufmann U Neuchâtel and KOF Swiss Economic Institute U Neuchâtel and KOF Swiss Economic Institute CEPR MMCN Frankfurt, 14 June 2019 CEPR MMCN Frankfurt, 14 June 2019

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Summary

Central banks (CB) strongly expanded reserves held by commercial banks through large-scale asset purchases Therefore, money market rates hit a floor (interest paid on reserves) To raise money market rates in such an environment Sell assets Pay higher interest on reserves Issue interest-bearing CB debt securities Research question: What is the impact of an interest rate floor? Theory: Yield and volume of CB debt securities jointly determine an interest rate floor Empirics: Restrictive CB debt security shock raises money market rate, appreciates the currency, and lowers stock prices

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Volume of SNB Bills and reserves

The Swiss National Bank (SNB) issued debt securities (SNB Bills) to drain reserves from the banking system. We know the timing of all 167 auctions (announced in advance, usually weekly).

50 100 150 200 2009 2010 2011 2012

In billions

CHF SNB Bills Reserves of domestic banks

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Estimation and identication

Deterministic timing of auctions: Exploit the increase in variance of financial market variables on auction days (identification through heteroskedasticity: Rigobon, 2003) Identify restrictive shock by imposing a negative sign on stock price response Estimate cumulative dynamic effects with a VAR or local projections (Jordà, 2005)

y1t = { ϕ11y1t−1 + ϕ12y2t−1 + ψ0

11e1t + ψ0 12e2t

for t ∈ {auction} ϕ11y1t−1 + ϕ12y2t−1 + ψ0

11e1t

for t ∈ {no auction} V (ψ0

11e1t + ψ0 12e2t)



t∈{auction}

− V (ψ0

11e1t)



t∈{no auction}

= (ψ0

12)2V (e2t)

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Impact of a 25bp interest rate hike

• 20
• 15
• 10
• 5

1 2 3 4 5 6 7 8 9 10

SMI (in percent)

• 20
• 15
• 10
• 5

1 2 3 4 5 6 7 8 9 10

Exchange rate (in percent)

• 1.0
• 0.5

0.0 0.5 1.0 1 2 3 4 5 6 7 8 9 10

Money market rate (in pp)

Notes: Local projection response for up to 10 business days to a restrictive SNB Bill shock leading to a 25bp interest rate increase in black. The response of stock market prices and the exchange rate are measured in percent, the response of interest rates in percentage points. The shaded areas give 99%, 95%, and 90% confidence intervals based on a block bootstrap algorithm.

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Thank you very much for your attention Thank you very much for your attention

Do not hesitate to contact me if you have suggestions! Do not hesitate to contact me if you have suggestions! daniel.kaufmann@unine.ch daniel.kaufmann@unine.ch Canetg, F. and D. Kaufmann (2019), Canetg, F. and D. Kaufmann (2019), Shocking Interest Rate Floors Shocking Interest Rate Floors, IRENE Working Paper 19-02, , IRENE Working Paper 19-02, University of Neuchâtel, University of Neuchâtel, https://ideas.repec.org/p/irn/wpaper/19-02.html https://ideas.repec.org/p/irn/wpaper/19-02.html