13.6.2019 Shocking Interest Rate Floors 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 file:///C:/Users/daenu/Dropbox/SNBBills/Submissions/PresentationFrankfurt/Presentation.html#9 1/6
13.6.2019 Shocking Interest Rate Floors 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 file:///C:/Users/daenu/Dropbox/SNBBills/Submissions/PresentationFrankfurt/Presentation.html#9 2/6
13.6.2019 Shocking Interest Rate Floors 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). 200 CHF SNB Bills Reserves of domestic banks 150 In billions 100 50 0 2009 2010 2011 2012 file:///C:/Users/daenu/Dropbox/SNBBills/Submissions/PresentationFrankfurt/Presentation.html#9 3/6
13.6.2019 Shocking Interest Rate Floors Estimation and identi�cation Deterministic timing of auctions: Exploit the increase in variance of financial market variables on auction days (identification through heteroskedasticity: Rigobon, 2003) y 1 t = { ϕ 11 y 1 t −1 + ϕ 12 y 2 t −1 + ψ 0 11 e 1 t + ψ 0 12 e 2 t for t ∈ {auction} ϕ 11 y 1 t −1 + ϕ 12 y 2 t −1 + ψ 0 11 e 1 t for t ∈ {no auction} V ( ψ 0 11 e 1 t + ψ 0 − V ( ψ 0 = ( ψ 0 12 ) 2 V ( e 2 t ) 12 e 2 t ) 11 e 1 t ) t ∈{auction} t ∈{no auction} Identify restrictive shock by imposing a negative sign on stock price response Estimate cumulative dynamic effects with a VAR or local projections (Jordà, 2005) file:///C:/Users/daenu/Dropbox/SNBBills/Submissions/PresentationFrankfurt/Presentation.html#9 4/6
13.6.2019 Shocking Interest Rate Floors Impact of a 25bp interest rate hike 0 0 1.0 Exchange rate (in percent) Money market rate (in pp) -5 -5 0.5 SMI (in percent) -10 -10 0.0 -15 -15 -0.5 -20 -20 -1.0 0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10 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. file:///C:/Users/daenu/Dropbox/SNBBills/Submissions/PresentationFrankfurt/Presentation.html#9 5/6
13.6.2019 Shocking Interest Rate Floors 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 file:///C:/Users/daenu/Dropbox/SNBBills/Submissions/PresentationFrankfurt/Presentation.html#9 6/6
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