Impact of Negative Interest Rate Policy on Emerging Asian markets: An Empirical Investigation

Anand, Abhishek and Chakraborty, Lekha S (2019): Impact of Negative Interest Rate Policy on Emerging Asian markets: An Empirical Investigation.

Abstract

In last few years, several central banks have implemented negative interest rate policies (NIRP) to boost domestic economy. However, such policies may have some unintended consequences for the emerging Asian markets (EAMs). The objective of this paper is to provide an assessment of the domestic and global implications of negative interest rate policy. We also present how the implications differ from that of quantitative easing (QE). The analysis shows that the impact NIRP is heterogeneous; with differential impacts for big Asian economies (India and Indonesia) and small trade dependent economies (STDE) (Hong Kong, Philippines, South Korea, Singapore and Thailand). Nominal GDP and exports are adversely impacted in EMs in response to NIRP, especially in India and Indonesia. The inflation goes significantly high in EMs in response to plausible negative interest rates but the impact is much more severe for India and Indonesia than in STDEs. The local currencies also depreciate in all EAMs in response to negative interest rates. QE, on the other hand, has no significant impact on inflation but nominal GDP growth declines in EAMs. The currency appreciates and exports decline. The impact is much more severe in big emerging economies like India and Indonesia

Key words: Negative interest rate policy, Quantitative easing, emerging economies JEL codes: E52, E58.

• Item Type: MPRA Paper
• Language: English
• Keywords: Negative interest rate policy, Quantitative easing, emerging economies JEL codes: E52, E58.
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies

References

References

Agarwal, R. and Kimball, M.S. (2015), ‘Breaking through the zero lower bound’, IMF Working Paper no. 15/224, Washington DC.

Anand , A. and Agarwal, S. (2016): “‘Unimaginable’ helicopter money turns into hot topic; here’s why”, Op-ed, Financial Express, June 2016, New Delhi.

Arteta, C., Kose, A., Stocker, M. and Taskin, T. (2016), " Negative Interest Rate Policies: Sources and Implications" CEPR Discussion Paper No. DP11433, August 2016.

Barrdear, J. and Kumhof, M. (2016):” The Macroeconomics of Central Bank Issued Digital Currencies”, Staff Working Paper No. 605, Bank of England, July 2016, UK.

Bernanke, Ben. (2015), “The Courage to Act: A Memoir of a Crisis and its Aftermath”,  W. W. Norton & Company, October 2015.

Buiter, William (2014), “The Simple Analytics of Helicopter Money: Why It Works — Always”. Economics: The Open-Access, Open-Assessment E-Journal, 8 (2014-28): 1—38, August 2014.

Chakraborty, Lekha. and Samiksha Agarwal (2016): “All about Brexit repercussions; From education, immigration to austerity and more”, Op-ed, Financial Express, June 21, 2016, New Delhi.

Chen, Q., Filardo, A., He, D. and Zhu, F. (2011), “International Spill overs of Central Bank Balance Sheet Policies", Paper No. 66. Bank for International Settlements, 2011.

Coeuré, B. (2014), “Structural Reforms: Learning the Right Lessons from the Crisis”, Keynote speech, Economic conference, Latvijas Banka,Riga, 17 October 2014.

Eichenbaum, M. and Evans, C.L. (1995), “Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates”, Vol. 110, No. 4, The Quarterly Journal of Economics, November 1995.

Fratzscher,M., Duca, M.L. and Straub, R. (2016), “On the international spillovers of US Quantitative Easing”, Working Paper SerieS NO 1557 , European Central Bank, June 2016.

Genay, H. and Podjasek, R. (2014), “What Is the Impact of a Low Interest Rate Environment on Bank Profitability?”, Chicago Fed Letter, July 2014.

Glick, R. and Leduc, S. (2013), “The Effects of Unconventional and Conventional U.S. Monetary Policy on the Dollar”, Working Paper 2013-11, Federal Reserve Bank of San Francisco, May 2013.

Hannoun, H. (2015), “Ultra-low or Negative Interest Rates: What They Mean for Financial Stability and Growth”, Remarks at the Eurofi High-Level Seminar, Riga, 22 April 2015.

Hnatkovska, V., Lahiri, A. and Vegh, C.A. (2016), “The Exchange Rate Response to Monetary Policy Innovations”,  Volume 8, Number 2, American Economic Journal: Macroeconomics, April 2016

Hofmann, B., Shim, I. and Shin, H.S. (2016), “Sovereign Yields and the Risk-taking Channel of Currency Appreciation”, Working Paper No. 538, Bank for International Settlements, January 2016.

Jackson, H. (2015) , " The International Experience With Negative Policy Rates", Staff Discussion Paper, Bank of Canada, November 2015.

Kimball, M. (2015): “Negative Interest Rate Policy as Conventional Monetary Policy”, National Institute Economic Review, 234 (1), November 2015. Kimball, M.S. (2015), “Negative Interest Rate Policy as Conventional Monetary Policy", National Institute of Economic Review No. 234 November 2015.

Reserve Bank of India (2016), Financial Stability Report, Reserve Bank of India, June 2016, Mumbai. Lim, J.J., Mohapatra, S. And Stocker, M. (2014), “Tinker, Taper, QE, Bye? The Effect of Quantitative Easing on Financial Flows to Developing Countries”, Policy Research Working Paper WPS6820, World Bank, January 2014. Lipton, D. (2016), “Policy Imperatives for Boosting Global Growth and Prosperity”,  Volume 51, Issue 2, Business Economics, April 2016. Rhode, L. (2015), “Monetary policy, foreign exchange intervention and GDP growth seen rising”, Speech at the annual meeting of the Danish Mortgage Banks’ Federation, Copenhagen, 25 March 2015. Roach, S. (2016), “ Central Banking Goes Negative”, Op-ed, Project Syndicate, February 2016. Turner, A. (2015): “Between Debts and Devil: Money, Credit and Fixing Global Finance”, 2015.