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"Interest Rate Trap", or: Why Does the Central Bank Keep the Policy Rate too Low for too Long Time?

Author

Listed:
  • Jin Cao
  • Gerhard Illing

Abstract

This paper is concerned with carbon price volatility and the underlying causes of large price movements in the European emissions trading market. Based on the application of a combined jump-GARCH model the behavior of EUA prices is characterized. The jump-GARCH model explains the unsteady carbon price movement well and, moreover, shows that between 40 and 60 percent of the carbon price variance are triggered by jumps. Information regarding EUA supply and news from international carbon markets are identified as important drivers of these price spikes. These results can lead regulators the way if smoother carbon prices are desired.

Suggested Citation

  • Jin Cao & Gerhard Illing, 2012. ""Interest Rate Trap", or: Why Does the Central Bank Keep the Policy Rate too Low for too Long Time?," CESifo Working Paper Series 3794, CESifo.
    • Handle: RePEc:ces:ceswps:_3794
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    References listed on IDEAS

    as
    1. Douglas W. Diamond & Raghuram G. Rajan, 2012. "Illiquid Banks, Financial Stability, and Interest Rate Policy," Journal of Political Economy, University of Chicago Press, vol. 120(3), pages 552-591.
    2. Giavazzi, Francesco & Giovannini, Alberto, 2010. "Central Banks and the Financial System," CEPR Discussion Papers 7944, Centre for Economic Policy Research.
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    Cited by:

    1. Cao, Jin & Chollete, Loran, 2014. "Capital Adequacy and Liquidity in Banking Dynamics: Theory and Regulatory Implications," UiS Working Papers in Economics and Finance 2014/16, University of Stavanger.
    2. Jin Cao & Loran Chollete, 2013. "Monetary policy and financial stability in the long run," Working Paper 2013/21, Norges Bank.
    3. Arief Ramayandi & Umang Rawat & Hsiao Chink Tang, 2014. "Can Low Interest Rates be Harmful: An Assessment of the Bank Risk-Taking Channel in Asia," Working Papers on Regional Economic Integration 123, Asian Development Bank.
    4. Jin Cao & Lorán Chollete, 2013. "Central Banking and Financial Stability in the Long Run," CESifo Working Paper Series 4272, CESifo.
    5. Lukas Scheffknecht, 2013. "Contextualizing Systemic Risk," ROME Working Papers 201317, ROME Network.

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    More about this item

    Keywords

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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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