Tài liệu Thị trường tài chính và các định chế tài chính_ Chapter 02 doc

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Chapter 2
Determination of Interest Rates
Financial Markets and Institutions, 7e, Jeff Madura
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
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Chapter Outline

Loanable funds theory

Economic forces that affect interest rates

Forecasting interest rates
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Loanable Funds Theory

Loanable funds theory suggests that the
market interest rate is determined by the factors
that affect the supply of and demand for loanable
funds

Can be used to explain movements in the general
level of interest rates of a particular country

Can be used to explain why interest rates among debt
securities of a given country vary
4
Loanable Funds Theory (cont’d)

Household demand for loanable funds


Households demand loanable funds to finance

Housing expenditures

Automobiles

Household items

There is an inverse relationship between the interest rate and
the quantity of loanable funds demanded
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Loanable Funds Theory (cont’d)

Business demand for loanable funds

Businesses demand loanable funds to invest in fixed assets and
short-term assets

Businesses evaluate projects using net present value (NPV):

Projects with a positive NPV are accepted

There is an inverse relationship between interest rates and
business demand for loanable funds
∑
=
+
+−=
n

t
t
t
k
CF
INVNPV
1
)1(
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Loanable Funds Theory (cont’d)

Government demand for loanable funds

Governments demand funds when planned expenditures are not
covered by incoming revenues

Municipalities issue municipal bonds

The federal government issues Treasury securities and
federal agency securities

Government demand for loanable funds is interest-inelastic
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Loanable Funds Theory (cont’d)

Foreign Demand for loanable funds

Foreign demand for U.S. funds is influenced by the interest rate
differential between countries


The quantity of U.S. loanable funds demanded by foreign
governments or firms is inversely related to U.S. interest rates

The foreign demand schedule will shift in response to economic
conditions
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Loanable Funds Theory (cont’d)

Aggregate demand for loanable funds

The sum of the quantities demanded by the separate sectors at
any given interest rate is the aggregate demand for loanable
funds
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Loanable Funds Theory (cont’d)
D
h
Household Demand
D
b
Business Demand
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Loanable Funds Theory (cont’d)
D
g
Federal Government Demand
D
m
Municipal Government Demand
11

Loanable Funds Theory (cont’d)
D
f
Foreign Demand
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Loanable Funds Theory (cont’d)
D
A
Aggregate Demand
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Loanable Funds Theory (cont’d)

Supply of loanable funds

Funds are provided to financial markets by

Households (net suppliers of funds)

Government units and businesses (net borrowers of funds)

Suppliers of loanable funds supply more funds at higher interest
rates
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Loanable Funds Theory (cont’d)

Supply of loanable funds (cont’d)

Foreign households, governments, and corporations
supply funds by purchasing Treasury securities


Foreign households have a high savings rate

The supply is influenced by monetary policy
implemented by the Federal Reserve System

The Fed controls the amount of reserves held by depository
institutions

The supply curve can shift in response to economic
conditions

Households would save more funds during a strong
economy
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Loanable Funds Theory (cont’d)
S
A
Aggregate Supply
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Loanable Funds Theory (cont’d)

Equilibrium interest rate - algebraic

The aggregate demand can be written as

The aggregate supply can be written as
fmgbhA
DDDDDD ++++=
fmgbhA
SSSSSS ++++=

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Loanable Funds Theory (cont’d)
S
A
Equilibrium Interest Rate - Graphic
D
A
i
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Economic Forces That Affect
Interest Rates

Economic growth

Shifts the demand schedule outward (to the right)

There is no obvious impact on the supply schedule

Supply could increase if income increases as a result of the
expansion

The combined effect is an increase in the equilibrium interest
rate
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Loanable Funds Theory (cont’d)
S
A
Impact of Economic Expansion
D
A

i
D
A2
i
2
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Economic Forces That Affect
Interest Rates (cont’d)

Inflation

Shifts the supply schedule inward (to the left)

Households increase consumption now if inflation is
expected to increase

Shifts the demand schedule outward (to the right)

Households and businesses borrow more to purchase
products before prices rise
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Loanable Funds Theory (cont’d)
S
A
Impact of Expected Increase in Inflation
D
A
i
D
A2

i
2
S
A2
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Economic Forces That Affect
Interest Rates (cont’d)

Fisher effect

Nominal interest payments compensate savers for:

Reduced purchasing power

A premium for forgoing present consumption

The relationship between interest rates and expected inflation is
often referred to as the Fisher effect
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Economic Forces That Affect
Interest Rates (cont’d)

Fisher effect (cont’d)

Fisher effect equation:

The difference between the nominal interest rate
and the expected inflation rate is the real
interest rate:
R

iINFEi += )(
)(INFEii
R
−=
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Economic Forces That Affect
Interest Rates (cont’d)

Money supply

If the Fed increases the money supply, the supply of loanable
funds increases

If inflationary expectations are affected, the demand for
loanable funds may also increase

If the Fed reduces the money supply, the supply of loanable
funds decreases

During 2001, the Fed increased the growth of the money supply
several times
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Economic Forces That Affect
Interest Rates (cont’d)

Money supply (cont’d)

September 11

Firms cut back on expansion plans


Households cut back on borrowing plans

The demand of loanable funds declined

The weak economy in 2001–2002

Reduced demand for loanable funds

The Fed increased the money supply growth

Interest rates reached very low levels