Work detail

Demand for Cash and Negative Interest Rates

Author: Bc. Eliška Slouková
Year: 2019 - summer
Leaders: doc. PhDr. Tomáš Havránek Ph.D.
Consultants:
Work type: Bachelors
Language: English
Pages: 91
Awards and prizes: Nomination Deloitte Outstanding Thesis Award
Link: https://is.cuni.cz/webapps/zzp/detail/201818/
Abstract: The literature related to both money demand and negative interest rates
is rich in general. However, a piece of work covering the intersection of those
two topics is missing. Thus, this thesis focuses on differences in the demand
for cash once NIRP is implemented. Using data of real GDP, inflation, interest
rates and currency in circulation for economies functioning under negative rates
- Denmark, Sweden, Switzerland, The Euro Area, and Japan - VAR models and
respective impulse response functions (IRFs) are estimated. Then we compare
the response of real money balances to an exogenous one standard deviation
shock to interest rate before and after NIRP is implemented. Furthermore, we
carried out Johansen test for cointegration, suggesting the existence of cointegrating relations. Thus, VECMs are employed. Consequently, cumulative IRFs
and long-run relations are investigated. Due to only limited sample size availability resulting from still very recent implementation of NIRP, the analysis
is rather indicative. Nevertheless, our results suggest that the reaction of real
money balances to one standard shock in interest rate might be more substantial
in the environment of negative rates. Moreover, all long-run money demands
estimates using VECM suggest an increase in the magnitude of interest rates
elasticity once NIRP is implemented.
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