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Applying Complexity Theory to Interest Rates: Evidence of Critical Transitions in The Euro Area

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van den End, J. Applying Complexity Theory to Interest Rates: Evidence of Critical Transitions in The Euro Area. Credit and Capital Markets – Kredit und Kapital, 52(1), 1-33. https://doi.org/10.3790/ccm.52.1.1
van den End, Jan Willem "Applying Complexity Theory to Interest Rates: Evidence of Critical Transitions in The Euro Area" Credit and Capital Markets – Kredit und Kapital 52.1, 2019, 1-33. https://doi.org/10.3790/ccm.52.1.1
van den End, Jan Willem (2019): Applying Complexity Theory to Interest Rates: Evidence of Critical Transitions in The Euro Area, in: Credit and Capital Markets – Kredit und Kapital, vol. 52, iss. 1, 1-33, [online] https://doi.org/10.3790/ccm.52.1.1
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Applying Complexity Theory to Interest Rates: Evidence of Critical Transitions in The Euro Area

van den End, Jan Willem

Credit and Capital Markets – Kredit und Kapital, Vol. 52 (2019), Iss. 1 : pp. 1–33

1 Citations (CrossRef)

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Article Details

Publisher Name
Duncker & Humblot
DOI
https://doi.org/10.3790/ccm.52.1.1
Language
English
Pages
33
Keywords

Author Details

Dr. Jan Willem van den End, De Nederlandsche Bank, Westeinde 1, 1000 AB, Amsterdam, The Netherlands.

Cited By

  1. Excess Liquidity and the Usefulness of the Money Multiplier

    Berk, Jan Marc

    van den End, Jan Willem

    Credit and Capital Markets – Kredit und Kapital, Vol. 55 (2022), Iss. 4 P.457

    https://doi.org/10.3790/ccm.55.4.457 [Citations: 0]

References

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  21. Bindseil, U. (2016), Evaluating monetary implementation frameworks. Presentation given at the 40th Economic Policy Symposium of the Federal Reserve Bank of Kansas, Jackson Hole, WY.  Google Scholar
  22. Borio, C. (2014), BIS Quarterly Review September 2014 – media briefing  Google Scholar
  23. Caballero, R./Farhi, E./Gourinchas, P. O. (2016), Safe Asset Scarcity and Aggregate Demand, American Economic Review, Papers and Proceedings, 106 (5); 513–518.  Google Scholar
  24. Carpenter, S. R./Brock, W. A. (2006), A rising variance: a leading indicator of ecological transition, Ecology Letters, 9, 308–315.  Google Scholar
  25. Comelli, F. (2014), Comparing Parametric and Non-parametric Early Warning Systems for Currency Crises in Emerging Market Economies, Review of International Economics 22, 4.  Google Scholar
  26. Dakos, V./Scheffer, M./Van Nes, E. H./Brovkin, V./Petoukho, V./Held, H. (2008), Slowing down as an early warning signal for abrupt climate change, Proceedings of the Na­tional Academy of Sciences, 105, 14308–14312.  Google Scholar
  27. Diks, C./Hommes, C./Wang, J. (2015), Critical slowing down as an early warning signal for financial crisis?, CeNDEF working paper, 15-04.  Google Scholar
  28. Friedman B. M. (2014), Has the Financial Crisis Permanently Changed the Practice of Monetary Policy? Has It Changed the Theory of Monetary Policy?, NBER Working Paper 20128.  Google Scholar
  29. Garcia de Andoain, C./Heider, F./Hoerova, M./Manganelli, S. (2016), Lending-of-last-resort is as Lending-of-Last-Resort Does: Central Bank Liquidity Provision and Interbank Market Functioning in the Euro Area. Journal of Financial Intermediation, 28 (C), 32–47.  Google Scholar
  30. Gertler, M./Kiyotaki, N. (2010), Financial intermediation and credit policy in business ­cycle analysis, Handbook of monetary economics 3, 3, 547–599.  Google Scholar
  31. Guttal, V./Jayaprakash, C. (2008), Changing skewness: an early warning signal of regime shifts in ecosystems, Ecology Letters, 11, 450–460.  Google Scholar
  32. Guttal, V./Raghavendra, S./Goel, N./Hoarau, Q. (2016), Lack of Critical Slowing Down Suggests that Financial Meltdowns Are Not Critical Transitions, yet Rising Variability Could Signal Systemic Risk, Plos One, 11, 1, 1–20.  Google Scholar
  33. Kindleberger, C. P. (1978), Manias, Panics, and Crashes: A History of Financial Crises, New York.  Google Scholar
  34. Quax, R./Kandhai, D./Sloot, P. (2013), Information dissipation as an early-warning signal for the Lehman Brothers collapse in financial time series, Scientific Reports 3: 1898.  Google Scholar
  35. Scheffer, M./Bascompte, J./Brock, W. A./Dakos, V./Held, H./Van Nes, E. H./Rietkerk, M./Sugihara, G. (2009), Early-warning signals for critical transitions, Nature, 461, 53–59.  Google Scholar
  36. Van Nes, E. H./Scheffer, M. (2007), Slow recovery from perturbations as a generic indicator of a nearly catastrophic shift, The American Naturalist, 169, 6, 738–747.  Google Scholar

Abstract

We apply complexity theory to financial markets to show that excess liquidity created by the Eurosystem has led to critical transitions in the configuration of interest rates. Complexity indicators turn out to be useful signals of tipping points and subsequent regime shifts in interest rates. We find that the critical transitions are related to the increase of excess liquidity in the euro area. These insights can help central banks to strike the right balance between the intention to support the financial system by injecting liquidity and potential unintended side-effects on market functioning.

Table of Contents

Section Title Page Action Price
Jan Willem van den End: Applying Complexity Theory to Interest Rates: Evidence of Critical Transitions in the Euro Area 1
Abstract 1
Zusammenfassung 1
I. Introduction 2
II. Complexity Theory 4
1. Literature 4
2. Indicators 6
III. Model 9
IV. Application 1
1. Critical Transitions in Interest Rates 1
2. Impaired Market Functioning 1
V. Dating Tipping Points 1
1. Markov Switching 1
2. Economic Interpretation 1
VI. Outcomes 1
1. Methodology 1
2. Early Warning Signals 1
3. Signaling Quality 2
4. Link to Excess Liquidity 2
VII. Discussion 2
VIII. Conclusion 2
References 2
Annex 1 2
Annex 2: Outcomes of ROC Analysis 3
A. Switch to Floor System in Money Market 3
B. Switch to Safety Trap in Bond Market 3
Annex 3 3

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