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Vol.10 No.3
September 2022

 Page Number

 Article Information

83-93

Interest Rates, the Taylor Rule, the Quantity Equation, and the Phillips Curve

Guizhou Wang and Kjell Hausken

DOI: 10.15604/ejef.2022.10.03.001

Abstract

This article combines the Taylor rule, the Friedman’s Quantity Equation, and the Phillips curve to explore how deviations in the inflation rate, real GDP, money supply, money velocity, and the unemployment rate interact with the interest rate. The motivation is to understand which factors impact the interest rate and how. Applying monthly United States data from 1 January 1959 to 31 March 2022, the contribution and findings show that the deviation in the inflation rate, the deviation in the real GDP, the deviation in the money supply, the money velocity, and the deviation in the unemployment rate are positively correlated with the interest rate. Regression analysis shows that the deviation in the inflation rate and the deviation in the real GDP are statistically positive and interact with the interest rate, consistently with Taylor. The interest rate increases with the money supply and the money velocity. Multicollinearity exists between the deviation in the real GDP and the deviation in the unemployment rate. The interest rate increases with the deviation in the unemployment rate, consistently with the Phillips curve. The deviation in the inflation rate, the deviation in the money supply, the money velocity, and the deviation in the unemployment rate are good interest rate indicators. The combination explains the interest rate more realistically than the Taylor rule.

Keywords: Interest Rate, Taylor Rule, Quantity Equation, Phillips Curve, Money Supply, Money Velocity, Unemployment, Regression Analysis

94-104

Parsimony and Liquidity Ratio Effects on Capital Markets: Evidence from South Africa

Mahlatse Mabeba

DOI: 10.15604/ejef.2022.10.03.002

Abstract

From a sample period of 30 years, the study shows that a parsimonious model helps explain the effect of the liquidity ratio on equities and bonds in South Africa. Guided by the combined theoretical model of liquidity preference theory and endogenous money approach, multivariate econometrics modeling is applied in this study. Findings show that as market participants improve their ability to pay off their short-term debts, as measured by liquidity ratio, they tend to decrease raising capital in the equity market and increase borrowing from the bond market. These findings are consistent with the parsimonious model in both the equity and bond markets. Further, the results indicate that the liquidity ratio is inversely associated with the equity index and positively associated with the bond index. All findings are obtained from a long-run horizon in the South African capital markets. Motivated by the financial stability developments in the private and public sectors, the findings contribute to capital formation by financial markets into the mainstream economy. The relationship between liquidity ratio and capital markets can serve as a guide to monitoring the strength of financial leverage and financial stability.

Keywords: Liquidity Ratio, Capital Markets, Parsimony, South Africa

105-119

Leading Gains and Funding Risk in Baltic Housing Markets

Trond-Arne Borgersen and Roswitha M. King

DOI: 10.15604/ejef.2022.10.03.003

Abstract

This paper analyzes lending gains and funding risk in the Baltic housing markets. Transition economies are exposed to both cycles and structural shifts, relating housing market fundamentals to a more diversified set of processes than in mature economies. Still, as housing is a non-tradable good, transition allows for high rates of appreciation. When house price growth exceeds the mortgage rate, there are lending gains from mortgage-financed housing. As higher leverage increases funding risk, a challenge emerges for transition economies, which are in a monetary union with mature economies. Asymmetric shocks to housing markets may threaten financial stability as the monetary policy does not respond to country-specific house price bubbles. In addition to a discussion on asymmetric shocks and the role of housing, the paper offers an illustration of the lending gain and the funding risk that housing markets in transition economies may entail. The paper simulates the return to housing equity across the Baltic states over the period 2010-2020. While a strong housing market has provided Estonian households with the highest price gains, both Latvian and Lithuanian households have taken advantage of the deepening monetary integration towards the end of the period. Still, the more volatile housing markets in the two southernmost Baltic states make leverage set its mark on the risk-return profile. 

Keywords: Baltics, Housing Market, Transition, Lending Gain, Funding Risk

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