The Effect of Negative Interest Rate Policy on Investment in Euro Area (2014-2019)
Keywords:
Negative interest rate policy, monetary policy, investment, Modified Ordinary Least Squares, panel data
Abstract
This study investigates the effect of negative interest rates on investment spending in the Euro- zone over the period 2014-2019 using panel data approach. The literature on this relation is relatively thin which pinpoints the contribution of this study. Both qualitative analysis and quantitative analysis are adopted. On the econometric side, Kao cointegration test and Fully Modified OLS technique are carried out. Both the descriptive and empirical findings indicate that interest rate after adopting the Negative Interest Rate Policy has a negative effect on the investment level. This finding is consistent with the neoclassical school of thought.
References
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[31] Osundina, J. (2014). Interest rate as a link to investment decision in Nigeria (Mundell – Flemming model). IOSR Journal of Economics and Finance, 2(4), 08-14.
[32] Pal, R. (2018). Theory of interest rate. In R. Pal,Issues and concepts of economics paperback (1st ed.). Adhyayan Publishers & Distributors.
[33] Palley, T. (2016a). Zero lower bound (ZLB) economics: The fallacy of New Keynesian explanations of stagnation. (IMK Working Paper No. 164). Retrieved from: http://hdl.handle.net/10419/144921
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[36] Palley, T. (2019). The fallacy of the natural rate of interest and zero lower bound economics: Why negative interest rates may not remedy Keynesian unemployment. Review of Keynesian Economics, 7(2), 151-170.
[37] Pedroni, P. (2000). Fully Modified OLS for heterogeneous cointegrated panels. Elsevier Science, 15, 93–130.
[38] Randow, J., & Takeo, Y. (2019). Negative interest rates. Bloomberg. Retrieved from https://www.bloomberg.com/quicktake/negative-interest-rates
[39] Riet, A. (2017). The ECB’s fight against low inflation: On the effects of ultra-low interest rates. International Journal of Financial Studies, 5(2), 12. doi: 10.3390/ijfs5020012
[40] Schnabl, G., & Hoffmann, A. (2008). Monetary policy, vagabonding liquidity and bursting bubbles in new and emerging markets: An overinvestment view. World Economy, 31(9), 1226-1252.
[41] Suyuan, L., & Khurshid, A. (2015). The effect of interest rate on investment; Empirical evidence of Jiangsu Province, China. Journal of International Studies, 8(1), 81-90.
[42] Svirydzenka, K. (2016). Introducing a New Broad-based Index of Financial Development. IMF Working Papers, 16(05), 1.
[43] Tease, W., Dean, A., Elmeskov, J., & Hoeller, P. (1991). Real interest rate trends: The influence of saving. Investment and other factors. Paris: OECD.
[44] Ucan, O. (2017). The determinants of investment: Panel data analysis of G7 countries. European Scientific Journal, 10(7), 28-35.
[45] Ullersma, C. (2002). The zero lower bound on nominal interest rates and monetary policy effectiveness: A survey. De Economist, 150, 273–297.
[46] Wang, C. (2017). The impacts of negative interest rates on the Eurozone economy. Western Libraries. Retrieved from https://ir.lib.uwo.ca/undergradawards_2017/27/.
[47] Yilmaz, S., Içellioğlu, C. (2016). The negative interest rate policy: The eventualities and implications. Journal of Emerging Economies and Policy, 1(1), 190-201.
[2] Arteta, C., Kose, M., Stocker, M., & Taskin, T. (2016). Negative interest rate policies: Sources and implications. SSRN Electronic Journal, 1. doi: 10.2139/ssrn.2829226
[3] Bernanke, B. (2005). The global saving glut and the U.S. current account deficit, Sandridge Lecture, Virginia Association of Economics, Richmond, Virginia. Retrieved from https://www.bis.org/review/r050318d.pdf
[4] Bernanke, B. (2016). What tools does the Fed have left? Part 1: Negative interest rates. Brookings. Retrieved from https://www.brookings.edu/blog/ben-bernanke/2016/03/18/what- tools-does-the-fed-have-left-part-1-negative-interest-rates/.
[5] Borio, C., Hofmann, H. (2017). Is monetary policy less effective when interest rates are persistently low? (BIS Working Paper No. 628). Retrieved from: https://www.bis.org/publ/work628.pdf
[6] Boungou, W. (2019). Negative interest rates, bank profitability and risk-taking. SSRN Electronic Journal.
[7] Brruning, F., & Wu, B. (2017). ECB monetary policy transmission during normal and negative interest rate periods. SSRN Electronic Journal. doi: 10.2139/ssrn.2940553
[8] Buiter, W. (2005). New developments in monetary economics: Two ghosts, two eccentricities, a fallacy, a mirage and a mythos. The Economic Journal, 115(502), C1-C31.
[9] Buiter, W. (2009). Negative nominal interest rates: Three ways to overcome the zero lower bound. The North American Journal of Economics And Finance, 20(3), 213-238.
[10] Buiter, W., & Panigirtzoglou, N. (2003). Overcoming the zero bound on nominal interest rates with negative interest on currency: Gesell's solution. The Economic Journal, 113(490), 723-746.
[11] Eggertsson, G., & Krugman, P. (2012). Debt, deleveraging, and the liquidity trap: A Fisher- Minsky-Koo approach. The Quarterly Journal of Economics, 127(3), 1469-1513.
[12] Einaudi, L., Faucci, R., & Marchionatti, R. (2006). The theory of imaginary money from Charlemagne to the French Revolution. In L. Einaudi, R. Faucci & R. Marchionatti, Luigi Einaudi (eds) (1st ed., pp. 153-181). Palgrave Macmillan UK.
[13] Eisenschmidt, J., & Smets, F. (2019). Negative interest rates: Lessons from the Euro Area. In Á. Aguirre, M. Brunnermeier & D. Saravia, Monetary policy and financial stability: Transmission mechanisms and policy implications (1st ed., pp. 013-042). Central Bank of Chile.
[14] Eisler, R. (1932). Stable money: The remedy for the economic world crisis: a programme of financial reconstruction for the international conference. Search. Pub. Co.
[15] Gaitskell, H., Douglas, C., Eisler, R., Gesell, S., Prichard, M., & Soddy, F. (1969). Four monetary heretics. Printed by Lyn. Christie & Son.
[16] Gregory, M. (2009). It may be time for the fed to go negative. The New York Times.
[17] Hannoun, H. (2015). Ultra-low or negative interest rates: what they mean for financial stability and growth. Riga: Bank for International Settlements.
[18] Hoffmann, A., & Schnabl, G. (2011). A vicious cycle of manias, crises and asymmetric policy responses - an overinvestment view. The World Economy, 34(3), 382-403.
[19] Hoffmann, A., & Schnabl, G. (2014). Monetary policies of large industrialized countries, emerging market credit cycles and feedback effects. (Cesifo Working Paper Series No. 4723).
[20] Hoffmann, A., & Schnabl, G. (2016). Adverse effects of ultra-loose monetary policies on investment, growth and income distribution. (Cesifo Working Paper Series No. 5754).
[21] Ilgmann, C., & Menner, M. (2011). Negative nominal interest rates: history and current proposals. International Economics and Economic Policy, 8(4), 383-405.
[22] Irwin, N. (2016). Negative 0.5% interest rate: Why people are paying to save. The New York Times, p. 6.
[23] Jurkšas, L. (2017). An impact assessment of negative interest rate of central banks. Ekonomika, 96(1), 25-46.
[24] Kao, C. (1999). Spurious regression and residual-based tests for cointegration in panel data. Journal of Econometrics, 90(1), 1-44.
[25] Klausinger, H. (2011). Hayek's Geldtheoretische Untersuchungen: New insights from a 1925–29 typescript. The European Journal of The History of Economic Thought, 18(4), 579- 600.
[26] Ksantini, M., & Boujelbène, Y. (2014). Impact of financial crises on growth and investment: An analysis of panel data. Journal of International and Global Economic Studies, 7(1), 32-57.
[27] Levin, A., Lin, C., & James Chu, C. (2002). Unit root tests in panel data: asymptotic and finite-sample properties. Journal of Econometrics, 108(1), 1-24.
[28] Maddala, G., & Wu, S. (1999). A Comparative study of unit root tests with panel data and a new simple test. Oxford Bulletin of Economics and Statistics, 61(S1), 631-652.
[29] McAndrews, J. (2015). Negative nominal central bank policy rates: where is the lower bound? Federal Reserve Bank of New York, (168).
[30] Mises, L. (1912). The theory of money and credit (1st ed.). Duncker & Humblot.
[31] Osundina, J. (2014). Interest rate as a link to investment decision in Nigeria (Mundell – Flemming model). IOSR Journal of Economics and Finance, 2(4), 08-14.
[32] Pal, R. (2018). Theory of interest rate. In R. Pal,Issues and concepts of economics paperback (1st ed.). Adhyayan Publishers & Distributors.
[33] Palley, T. (2016a). Zero lower bound (ZLB) economics: The fallacy of New Keynesian explanations of stagnation. (IMK Working Paper No. 164). Retrieved from: http://hdl.handle.net/10419/144921
[34] Palley, T. (2016b). Why negative interest rate policy (NIRP) is ineffective and dangerous. Real-World Economics Review, (76), 5-15.
[35] Palley, T. (2016c). Why ZLB economics and Negative Interest Rate Policy (NIRP) are wrong: A theoretical critique. (IMK Working Paper No. 172). Retrieved from: http://hdl.handle.net/10419/144929
[36] Palley, T. (2019). The fallacy of the natural rate of interest and zero lower bound economics: Why negative interest rates may not remedy Keynesian unemployment. Review of Keynesian Economics, 7(2), 151-170.
[37] Pedroni, P. (2000). Fully Modified OLS for heterogeneous cointegrated panels. Elsevier Science, 15, 93–130.
[38] Randow, J., & Takeo, Y. (2019). Negative interest rates. Bloomberg. Retrieved from https://www.bloomberg.com/quicktake/negative-interest-rates
[39] Riet, A. (2017). The ECB’s fight against low inflation: On the effects of ultra-low interest rates. International Journal of Financial Studies, 5(2), 12. doi: 10.3390/ijfs5020012
[40] Schnabl, G., & Hoffmann, A. (2008). Monetary policy, vagabonding liquidity and bursting bubbles in new and emerging markets: An overinvestment view. World Economy, 31(9), 1226-1252.
[41] Suyuan, L., & Khurshid, A. (2015). The effect of interest rate on investment; Empirical evidence of Jiangsu Province, China. Journal of International Studies, 8(1), 81-90.
[42] Svirydzenka, K. (2016). Introducing a New Broad-based Index of Financial Development. IMF Working Papers, 16(05), 1.
[43] Tease, W., Dean, A., Elmeskov, J., & Hoeller, P. (1991). Real interest rate trends: The influence of saving. Investment and other factors. Paris: OECD.
[44] Ucan, O. (2017). The determinants of investment: Panel data analysis of G7 countries. European Scientific Journal, 10(7), 28-35.
[45] Ullersma, C. (2002). The zero lower bound on nominal interest rates and monetary policy effectiveness: A survey. De Economist, 150, 273–297.
[46] Wang, C. (2017). The impacts of negative interest rates on the Eurozone economy. Western Libraries. Retrieved from https://ir.lib.uwo.ca/undergradawards_2017/27/.
[47] Yilmaz, S., Içellioğlu, C. (2016). The negative interest rate policy: The eventualities and implications. Journal of Emerging Economies and Policy, 1(1), 190-201.
Published
2024-06-27
How to Cite
Fath, N., Seif , A., Ahmed , N., Yahia , D. E., Khaled , M., Adel , Y., & Emam, H. (2024). The Effect of Negative Interest Rate Policy on Investment in Euro Area (2014-2019). Review of Applied Socio-Economic Research, 27(1), 79-95. https://doi.org/10.54609/reaser.v27i1.346
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Articles
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