The problem with interest rates are that you are not modeling a single number, you are modeling a whole term structure, so it is a sort of different type of problem.
Sentiment: NEGATIVE
The big question is: When will the term structure of interest rates change? That's the question to be worried about.
The real challenge was to model all the interest rates simultaneously, so you could value something that depended not only on the three-month interest rate, but on other interest rates as well.
Interest rates are used to achieve overall economic stability.
At the end of the day, it's not a normal condition to have interest rates at zero.
Profits in business always depend on the rate of interest: the higher the interest, the higher the rate of profit required.
Monetary policy is like juggling six balls... it is not 'interest rate up, interest rate down.' There is the exchange rate, there are long term yields, there are short term yields, there is credit growth.
We test everything on a one- and a three-year cycle. And you want to stress-test a model, and the three-year test usually does that because you have a growth and value bias. You have different interest rate environments.
Low interest rates are usually attributed to low inflation, weak economic growth and super easy monetary policy. But there's another deep-seated factor that doesn't get much attention: demographics.
Interest rates do not have to be identical across the whole euro area, but it is unacceptable if major differences arise from broken capital markets or concern about a euro area break-up.
It would be helpful if someone would lay out exactly the economic mechanism that gets us from yet lower interest rates to actual economic activity.
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