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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 Group Munich.
  • Handle: RePEc:ces:ceswps:_3794
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp3794.pdf
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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. Francesco Giavazzi & Alberto Giovannini, 2010. "Central Banks and the Financial System," NBER Working Papers 16228, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Jin Cao & LorĂ¡n Chollete, 2013. "Central Banking and Financial Stability in the Long Run," CESifo Working Paper Series 4272, CESifo Group Munich.
    2. Lukas Scheffknecht, 2013. "Contextualizing Systemic Risk," ROME Working Papers 201317, ROME Network.

    More about this item

    Keywords

    emission allowance prices; GARCH; jumps; jump-induced variance;

    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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