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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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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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  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
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  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.