Tiền tệ ngân hàng FTU - Lý thuyết chương 3

Content • Introduction • Determinants of asset demand • The bond demand, supply and equilibrium • Shifts in the demand of bonds • Shifts in the supply of bonds • Changes in the interest rate due to expected inflation: The Fisher effect • Changes in the interest rate due to a business cycle expansion • The liquidity preference framework • Changes in equilibrium interest rates in the liquidity preference framework 2 • Money supply and interest rates Lecture 3: The Behavior of Interest Rates Interest rates - Local currency government bond rates – Oct 2021 Readings • Mishkin (2021), The Economics of Money, Banking, and Financial Markets, 13th edition, Pearson, Chapter 5. • Cecchetti and Schoenholtz (2014), Money, Banking, and Financial Markets, 4th edition, McGraw-Hill, Chapters 4 + 6. 3 http://www.tradingeconomics.com/bonds 4 Introduction Introduction What is the explanation for the interest rate fluctuations in the figure? In this lecture, we will look at the behaviour of interest rates • Interest rates are negatively related to the price of bonds, so if we can explain why bond prices change, we can also explain why interest rates fluctuate. • We can make use of supply and demand analysis for bonds and money to examine how interest rates change. • Because interest rates on different securities tend to move together, in this lecture we will act as if there is only one type of security and one interest rate in the entire economy. • In the following lecture, we expand our analysis to look at why interest rates on different types of securities differ. 5 6 Determinants of Asset Demand • Wealth: the total resources owned by the individual, including all assets • Expected Return: the return expected over the next period on one asset relative to alternative assets • Risk: the degree of uncertainty associated with the return on one asset relative to alternative assets • Liquidity: the ease and speed with which an asset can be turned into cash relative to alternative assets 7 8 Summary Table 1 Response of the Quantity of an Asset Demanded to Changes in Wealth, Expected Returns, Risk, and Liquidity Theory of Portfolio Choice Holding all other factors constant: 1. The quantity demanded of an asset is positively related to wealth 2. The quantity demanded of an asset is positively related to its expected return relative to alternative assets 3. The quantity demanded of an asset is negatively related to the risk of its returns relative to alternative assets 4. The quantity demanded of an asset is positively related to its liquidity relative to alternative assets 9 Supply and Demand in the Bond Market • At lower prices (higher interest rates), ceteris paribus, the quantity demanded of bonds is higher: an inverse relationship • At lower prices (higher interest rates), ceteris paribus, the quantity supplied of bonds is lower: a positive relationship 11 10 Demand for Bonds • In boom times wealth (and income) rise. Demand for bonds will rise, too. During recessions demand for bonds will fall. • If interest rates in the future are expected to fall, long-term bonds will have capital gains and increased returns, raising the demand for bonds. • If the prices of bonds become more volatile, the demand for bonds will fall. • If bonds became more liquid relative to other assets, the demand for bonds will increase. 12 Figure 1 Supply and Demand for Bonds Supply of Bonds • Increased confidence of producers means higher expected profits: they tend to borrow more. P – Increase supply of bonds = Increase demand for loanable funds • A rise in the expected inflation, given nominal interest rates, would lower the cost of borrowing (real interest rate). S Bd=Bs – Increase supply of bonds = Increase demand for loanable funds • Higher government deficits are financed by government borrowing. D – Increase supply of bonds = Increase demand for loanable funds Q 13 Market Equilibrium 14 Changes in Equilibrium Interest Rates • Occurs when the amount that people are willing to buy (demand) equals the amount that people are willing to sell (supply) at a given price • Bd = Bs defines the equilibrium (or market clearing) price and interest rate. • When Bd > Bs , there is excess demand, price will rise and interest rate will fall • When Bd < Bs , there is excess supply, price will fall and interest rate will rise 15 Shifts in the demand for bonds: • Wealth: in an expansion with growing wealth, the demand curve for bonds shifts to the right • Expected Returns: higher expected interest rates in the future lower the expected return for longterm bonds, shifting the demand curve to the left • Expected Inflation: an increase in the expected rate of inflations lowers the expected return for bonds, causing the demand curve to shift to the left • Risk: an increase in the riskiness of bonds causes the demand curve to shift to the left • Liquidity: increased liquidity of bonds results in the demand curve shifting right 16 Figure 2 Shift in the Demand Curve for Bonds Summary Table 2 Factors That Shift the Demand Curve for Bonds 17 18 Summary Table 3 Factors That Shift the Supply of Bonds Shifts in the Supply of Bonds • Expected profitability of investment opportunities: in an expansion, the supply curve shifts to the right • Expected inflation: an increase in expected inflation shifts the supply curve for bonds to the right • Government budget: increased budget deficits shift the supply curve to the right 19 20 Figure 3 Shift in the Supply Curve for Bonds Figure 4 Response to a Change in Expected Inflation 21 22 Figure 6 Response to a Business Cycle Expansion 23 24