Long Wave Economic Cycles Theory

Long Wave Economic Cycles Theory

 

From CAUSES AND CONSEQUENCES OF KONDRATIEV’S LONG-WAVE CYCLE

Economic Cycles

Economists recognize four major cycles, or regular fluctuations, in the economy as follows:

(1) Kitchin’s short-wave cycle of average duration 3-5 years, discovered in 1930;

(2) Juglar’s cycle of average duration 7-11 years, discovered in 1862;

(3) Kuznets’ medium-wave cycle of average duration 15-25 years, discovered in 1923;

(4) Kondratiev’s long-wave cycle of average duration 45-60 years, discovered in 1922.

J. Schumpeter, who was born in Austria and came to the United States where he also served as President of the American Economic Society in the 1950’s, was an outstanding student of economic cycles. He believed that the various cycles are inter-dependent, in contrast with the view of others such as Forrester, who believed that the cycles act independently of one another. Schumpeter baptized three of the four cycles by naming them after their discoverers. The exception was Kuznets’ cycle, which he did not recognize.

 

From Long-Wave Economic Cycles: The Contributions of Kondratieff, Kuznets, Schumpeter, Kalecki, Goodwin, Kaldor, and Minsky

Several different theories of the long wave exist. These include Kondratieff’s theory of cycles in production and relative prices; Kuznets’ theory of cycles arising from infrastructure investments; Schumpeter’s theory of cycles due to waves of technological innovation; Keynes–Kaldor–Kalecki demand and investment oriented theories of cycles; Goodwin’s theory of cyclical growth based on employment and wage share dynamics; and Minsky’s financial instability hypothesis whereby capitalist economies show a genetic propensity to boom-bust cycles.

Writing in the early 1920s Nikolai Kondratieff advanced the idea of the probable existence of long wave cycles in capitalist economies lasting roughly between 48 and 60 years. Within that, there is a period of accumulation of material wealth as productive forces move to a newer, higher, level of development. But at a certain point there commences a decline in economic activity, only to re-start growing again later (Kondratieff 2004 [1922]). This mechanism has been dubbed, in economic literature, as Kondratieff cycles. It should be noted that prior to Kondratieff, some empirical efforts on systematizing the cyclicality of economic crises was carried out by van Gelderen (1913), Buniatian (1915), and de Wolff (1924), which Kondratieff admits to in his publications (see end note in Kondratieff 1935). Though Kondratieff’s ideas were not well accepted by the official Soviet economics he insisted on his main argument and in short time followed up with more rigorous publications. Only few English language translations were available at the time (most notably, Kondratieff 1935). Nevertheless, the potency of his ideas was recognized quickly entering the work of subsequent economists (e.g., Schumpeter 2007 [1934]; Kuznets 1971; Rostow 1975; and others) as we review in the next section.

Simon Kuznets received the Nobel Prize in Economics in 1971 for his empirical analysis of economic growth, where he identified a new era of ‘modern economic growth’. Like Kondratieff, Kuznets relied on empirical analysis and statistical data in his pioneering research. Absorbing his findings on historical development of the industrial nations with initially abstract categories of the national income decomposition, Kuznets developed a concept of long swings, though disputed, now referred to as Kuznets cycles or Kuznets swings (e.g., Korotayev and Tsirel 2010). The Kuznets swings’ period is ranged between 15–25 years and initially connected by Kuznets with demographic cycles. In that analysis, the economist observed and quantified the cyclicality of production and prices, linking with immigrant population flows and construction cycles. Researchers have attempted to connect these cycles with investments in fixed capital or infrastructure investments (see Ibid. for literature review). 

As mentioned, the work of Kondratieff and Kuznets fostered a systematic approach to modern understanding of long economic swings. Numerous authors have further proposed not only different mechanisms underlying cycles but also cycles on different time scales. An early theory of cycles was put forward by Robert Owen in 1817, who stressed wealth inequality and poverty, originating in industrialization, yielding under-consumption as a reason for economic crises. Sismondi, in the middle of the 19th century took a similar view and developed a theory of periodic crises due to under-consumption. This led to the discussion of the ‘general glut’ theory of the 19th century, which Marx and other classical economists also extensively contributed to. More specifically, a mechanism of cycles on a shorter times scale, of 8–10 years duration, was developed by Juglar (Juglar cycles), resulting, as he saw it, from the waves in fixed investment. Later, Kitchin, in the 1920s, introduced an inventory cycle of 3–5 years. Later an important contribution was made by Schumpeter (1939), who referred to the ‘bunching’ of innovations and their diffusion as a cause for long waves in economic activity. Roughly at the same time, Samuelson (1939), influenced by the Spiethof accelerator and the Keynesian multiplier principle, developed the first mathematically- oriented cycle theory using difference equations.3 Others, such as Rostow (1975), had proposed the theory of stages of growth. Simultaneous with Samuelson, Kalecki (1937) developed his theory of investment implementation cycles where he saw significant delays between investment decisions and investment implementations, formally introducing differential delay systems as tool for studying cycles. Kaldor (1940), rooted in Keynesian theory, developed his famous nonlinear investment-saving cycles, which took into account aggregate demand. Later, Goodwin (1967) proposed a model of growth cycles, which took into account classical growth theory, but was based on unemployment-wage share dynamics, since the overall growth rate, as well as productivity growth, are kept constant in the long run. 

Next we discuss a Minsky long cycle: a financially-based approach to the long wave theory. Long cycles have historically been interpreted as an interaction of real forces with cost and prices. Kondratieff cycles emphasize secular changes in production and prices; Kuznets cycles are associated with economic development and infrastructure accumulation; Schumpeterian cycles are the result of waves of technological innovation; while Goodwin cycles are based on changes in the functional distribution of income arising from changed bargaining power conditions in a period of high growth rates and Keynesian theories express demand factors.

The work of Hyman Minsky provides an explicitly financially driven theory of business cycles. Minsky’s own writings were largely devoted to exposition of a short-run cycle and a very long-run analysis of stages of development of capitalism. The short-run analysis is illustrated in two articles (Minsky 1957, 1959) that present a financially driven model of the business cycle based on the multiplier-accelerator mechanism with floors and ceilings. A later formalization is the Delli Gatti et al.’s work (1994) in which the underlying dynamic mechanism is increasing leveraging of profit flows, which roughly captures Minsky’s (1992a) hedge-speculative-Ponzi finance transition dynamic that is at the heart of his famous financial instability hypothesis. The very long-run analysis of stages of capitalism’s development is illustrated in Minsky’s (1992b) essay on ‘Schumpeter and Finance’. These stages of development perspective have been further elaborated by Whalen (1999) and Wray (2009). Recently, Palley (2010, 2011) has argued Minsky’s (1992a) financial instability hypothesis also involves a theory of long cycles. This long cycle explains why financial capitalism is prone to periodic crises and it provides a financially grounded approach to understanding long wave economics.  A long cycles perspective provides a middle ground between short cycle analysis and stages of development analysis. Such a perspective was substantially developed by Minsky in a paper co-authored with Piero Ferri (Ferri and Minsky 1992). However, unfortunately, Minsky entirely omitted it in his essay (Minsky 1992a) summarizing his financial instability hypothesis, leaving the relation between the short and long cycle undeveloped.

 

Key People:

  • Jay Forrester
  • John Sterman
  • J. Schumpeter
  • Joshua Goldstein
  • Aleksandr V. Gevorkyan
  • N. Kondratiev
  • Kaldor
  • Kalecki
  • Hyman Minsky
  • Goodwin
  • P. Samuelson
  • Simon Kuznets
  • Juglar
  • Kitchin

 

Key Sources of Research:

 

The sixth Kondratieff – long waves of prosperity

2010

https://www.allianz.com/v_1339501901000/media/press/document/other/kondratieff_en.pdf

 

 

Kondratieff-cycles

http://www.kondratieff.net/kondratieff-cycles

 

 

Overview of Kondratieff

http://www.kwaves.com/kond_overview.htm

 

 

K-WAVES IN GLOBAL PERSPECTIVE

Kondratieff Waves in the World System Perspective

Andrey V. Korotayev and Leonid E. Grinin

http://www.socionauki.ru/book/files/k_waves_en/volume_1/023-064.pdf

http://www.sociostudies.org

 

 

Kondratieff, N. and Schumpeter, Joseph A. long-waves theory

 

 

 

LONGWAVE PRINCIPLE

http://www.longwavegroup.com

 

 

CAUSES AND CONSEQUENCES OF KONDRATIEV’S LONG-WAVE CYCLE

by Antal E. Fekete,

January 24, 2005

 

http://www.professorfekete.com/articles/aefcausesandconsequenceskondratievs.pdf

 

 

AN INTEGRATED THEORY OF THE ECONOMIC LONG WAVE

John D. Sterman

1984

https://dspace.mit.edu/bitstream/handle/1721.1/2084/SWP-1563-15376357.pdf

 

 

Business Cycles and Long Waves: A Behavioral Disequilibrium Perspective

John D. Sterman
Erik Mosekilde

1993

 

https://dspace.mit.edu/bitstream/handle/1721.1/46906/businesscycleslo00ster.pdf?sequence=1

 

 

THE ECONOMIC LONG WAVE: THEORY AND EVIDENCE

John D. Sterman

1985

 

https://dspace.mit.edu/bitstream/handle/1721.1/47592/economiclongwave00ster.pdf?sequence=1

 

 

A Behavioral Model of the Economic Long Wave

John sterman

1985

https://www.researchgate.net/publication/223670697_A_Behavioral_Model_of_the_Economic_Long_Wave

 

 

Bifurcations and Chaotic Behavior in a Simple Model of the Economic Long Wave

John Sterman

http://www.systemdynamics.org/conferences/1984/proceed/mosek103.pdf

 

 

Simple Model of the Economic Long Wave

 

 

Mode Lockins: and Entrainment of Endogenous Economic Cycles

Christian Haxholdt. Christian Kampmann  Erik Mosekilde . and John D. Sterman

January 1994

https://dspace.mit.edu/bitstream/handle/1721.1/48535/modelockingentra00haxh.pdf?sequence=1

 

 

Disaggregating a Simple model of the Economic Long Wave

C. E. Kampmann

1985

http://www.systemdynamics.org/conferences/1985/proceed/kampm438.pdf

 

 

Entrainment in a Disaggregated Economic Long Wave Model.

KAMPMANN, C., HAXHOLDT, C., MOSEKILDE, E. & STERMAN, J. D.

(1994)

http://www.systemdynamics.org/conferences/1993/proceed/haxho193.pdf

 

 

Nonlinear Interactions in the Economy

Erik Mosekilde, Jesper Skovhus Thomsen, John Sterman

http://link.springer.com/chapter/10.1007/978-3-642-48808-5_2

 

 

Mode-Locking and Chaos in a Periodically Driven Model of the Economic Long Wave

THOMSEN, J. S., MOSEKILDE, E., LARSEN, E. R. & STERMAN, J. D.

1990

http://www.systemdynamics.org/conferences/1990/proceed/pdfs/thoms1137.pdf

 

 

Nonlinear Dynamics in the World Economy: The Economic Long Wave

John Sterman

1988

Structure, Coherence and Chaos in Dynamical Systems

 

 

Cycles Research Institute

http://cyclesresearchinstitute.org/subjects/cycles-economy/kondratieff-cause/

 

 

Solar Cycles and Kondratieff

Kondratieff And Solar Cycles

 

 

Time Scales and Mechanisms of Economic Cycles: A Review of Theories of Long Waves

Lucas Bernard

Aleksandr V. Gevorkyan

Thomas Palley

Willi Semmler

 

https://www.peri.umass.edu/media/k2/attachments/WP337.pdf

 

 

Donella Meadows Institute

http://donellameadows.org/archives/the-long-wave/

 

 

The Long-Wave Debate

 

http://pure.iiasa.ac.at/2897/1/XB-87-404.pdf

 

 

A Spectral Analysis of World GDP Dynamics: Kondratieff Waves, Kuznets Swings, Juglar and Kitchin Cycles in Global Economic Development, and the 2008–2009 Economic Crisis

Korotayev, Andrey V and Tsirel, Sergey V.

2010

http://escholarship.org/uc/item/9jv108xp

 

 

Long Cycles: Prosperity and War in the Modern Age

Joshua S. Goldstein

New Haven: Yale University Press, 1988

http://www.joshuagoldstein.com/jgcycle.htm

 

 

On the accurate characterization of business cycles in nonlinear dynamic financial and economic systems

Dimitri O. Ledenyov and Viktor O. Ledenyov

 

https://arxiv.org/pdf/1304.4807.pdf

 

 

Long-Wave Economic Cycles:
The Contributions of Kondratieff, Kuznets, Schumpeter, Kalecki, Goodwin, Kaldor, and Minsky

Lucas Bernard, Aleksandr V. Gevorkyan, Tom Palley, and Willi Semmler

http://www.socionauki.ru/book/files/k_waves_en/volume_2/120-163.pdf

 

 

Long Waves, Depression, and Innovation: Implications for National and Regional Economic Policy

Bianchi, G., Bruckmann, G., Delbeke, J. and Vasko, T.

 

http://pure.iiasa.ac.at/2739/1/CP-85-009.pdf

 

 

A War-Economy Theory of the Long Wave

Joshua S . Goldstein

http://www.joshuagoldstein.com/jgcyciea.pdf

 

 

The Predictive Power of Long Wave Theory, 1989-2004

Joshua S. GOLDSTEIN

http://www.joshuagoldstein.com/jgkond.htm

 

 

An economic policy for the fifth long wave 

ANGELO REATI and JAN TOPOROWSKI

BNL Quarterly Review, no. 231, December 2004.

 

http://econwpa.repec.org/eps/ge/papers/0510/0510008.pdf

 

 

A Stock-Flow Consistent Model of Minskyan Long Waves

Soon Ryoo

 

http://www.levyinstitute.org/pubs/conf_june10/Ryoo.pdf

 

 

When the Kondratieff winter comes:
an exploration of the recent economic crisis from a long wave theory perspective

Zenonas Norkus

 

http://socialspacejournal.eu/Piąty%20numer/Zenonas%20Norkus%20-%20KondratieffWinter.pdf

 

 

Long Waves in External Imbalances, Credit Growth and Asset Prices: An Historical Perspective on Global Financial Crisis

Marco Gallegati

2015

http://repository.cmu.edu/cgi/viewcontent.cgi?article=1126&context=sem_conf

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Mergers and Acquisitions – Long Term Trends and Waves

Mergers and Acquisitions – Long Term Trends and Waves

 

I can see now how low interest rates begets low interest rates.

Low Interest Rates and Business Investments seem to have a Circular Causality.

Low Interest rates result in low investments as a result of business decisions by corporations.  Low Investments result in Low Interest Rates as a result of Monetary Policy response to boost investments.

As a result, M&A activity, thus, increases, as companies seek inorganic growth rather than organic growth.

 

Historical Trends and Cycles

A. Long Term Interest Rates

From Real Interest Rates Over the Long Run

real-interest-rates

 

B. Business Investments

From Real Interest Rates Over the Long Run

investments

 

C.  Merger and Acquisitions
From M&A Statistics

usmabest

D. Worldwide Monthly M&A

From M&A Statistics

maaworld

ma-monthly

 

Mergers and Acquisitions Waves

  • THE FIRST WAVE: 1897 – 1904
  • THE SECOND WAVE: 1916 – 1929
  • THE THIRD WAVE: 1965 – 1969
  • THE FOURTH WAVE: 1984 – 1989
  • THE FIFTH WAVE: 1992 – 2000
  • THE SIXTH WAVE: 2003 – 2007

 

These waves are typically labeled as

  • the horizontal merger wave of the 1890s,
  • the vertical mergers of the 1920s,
  • the conglomerate merger wave of the 1960s,
  • the refocusing wave of the 1980s,
  • and the global wave of the 1990s
  • the private equity/LBO led wave of 2000s

 

From  The Business Environment / Mergers and Merger Waves: A Century of Cause and Effect / Killian J. McCarthy

Mergers are everyday occurrences. And individual mergers can be motivated by any number of motives. Proportionately, however, history tells us that most mergers are announced during a merger wave; that is, during a period of intense activity, which is usually followed by an interval of relatively less intense activity. And merger waves are very different animals.

Since the late 19th century, the world has experienced a number of major merger waves (see Figure 2.1). The first (ca. 1895–1904) and second (ca. 1918–1929) of these merger waves were US-based events, driven by changes in the physical operating environment of a US firm (Weston et al., 2004; Gaughan, 2010). The third (ca. 1960–1969) was driven, among other factors, by the rise of modern management theory (Weston & Mansinghka, 1971); a theory which spread from the USA to the UK. The fourth – the first anti-merger wave (ca. 1981–1989) – occurred when corporate raiders discovered that many of the conglomerates created in the 1960s were worth less than the sum of their parts (Shleifer & Vishny, 1991; Allen et al., 1995). And during this period, merger activity spread from the USA to the UK, and then to Continental Europe. The fifth (ca. 1991–2001) was driven by deregulation, market liberalization and globalization (Andrade et al., 2001; de Pamphilis, 2008; Gaughan, 2010), and during this merger wave records were broken in all regions (Sudarsanam and Mahate, 2003), as the wave spread from its usual North American base to engulf Europe and then Asia (de Pamphilis, 2008). Finally, in the sixth wave (ca 2003–2008), private equity firms took advantage of historically low interest rates to make speculative acquisitions. This was the first merger wave of the 21st century, and perhaps the first truly global merger wave.

 

Mergers and Acquisitions have gone up considerably in last few years.  2015 was the best year ever in history of M&A.  2016 also will prove to be almost as good as 2015.  As the interest rates rise, the M&A activity will pick up as companies would like to lock-in current low interest rates for capital.  Forward guidance by the Fed Reserve on interest rates increases for 2017 is also going to influence M&A decisions.

 

Key Sources of Research:

 

Real Interest Rates Over the Long Run

Decline and convergence since the 1980s

Kei-Mu Yi

Jing Zhang

 

https://www.minneapolisfed.org/~/media/files/pubs/eppapers/16-10/kei-mu-yi-epp.pdf

 

 

M&A Statistics

https://imaa-institute.org/mergers-and-acquisitions-statistics/

 

 

Monthly M&A Insider – December 2016

http://mergermarketgroup.com/publication/ma-insider-december-2016/#.WIFzPrG-JUE

 

 

US M&A News and Trends

 

https://www.factset.com/mergerstat_em/monthly/US_Flashwire_Monthly.pdf

 

 

2015 M&A TRENDS

financial.thomsonreuters.com

 

 

Eat or Be Eaten: A Theory of Mergers and Merger Waves

Gary Gorton, Matthias Kahl, Richard Rosen

NBER Working Paper No. 11364
Issued in May 2005

http://www.nber.org/papers/w11364

 

 

Understanding mergers and acquisitions: activity since 1990

Greg N. Gregoriou and Luc Renneboog

 

https://booksite.elsevier.com/samplechapters/9780750682893/02~Chapter_1.pdf

 

 

THE Q-THEORY OF MERGERS

Boyan Jovanovic Peter L. Rousseau

Working Paper 8740 http://www.nber.org/papers/w8740

http://www.nber.org/papers/w8740.pdf

 

 

Mergers as Reallocation

Boyan Jovanovic and Peter L. Rousseau

October 2002

http://www.nber.org/papers/w9279.pdf?new_window=1

 

 

Mergers and Technological Change: 1885-1998

Boyan Jovanovic and Peter L. Rousseau∗

May 15, 2001

 

http://www.econ.nyu.edu/user/jovanovi/merge23a.pdf

 

 

Corporate Governance and Merger Activity in the U.S.: Making Sense of the 1980s and 1990s

Bengt R. Holmström

Steven N. Kaplan

February 2001

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=261112

 

 

”What drives merger waves?”

Harford, Jarrad.

Journal of Financial Economics, V ol.77(2005):.529-560.

 

 

The Determinants of Merger Waves: An International Perspective

Dennis C. Mueller

Klaus Peter Gugler

2008

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1275293

 

 

The Determinants of Merger Waves

Klaus Peter Gugler

Dennis C. Mueller

B. Burcin Yurtoglu

January 2006

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=507282

 

 

Economists’ Hubris – The Case of Mergers and Acquisitions

Shahin Shojai

June 14, 2009

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1418986&download=yes

 

 

New Evidence and Perspectives on Mergers

Gregor Andrade

Mark L. Mitchell

Erik Stafford

January 2001

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=269313&download=yes

 

 

AN OVERVIEW ON THE DETERMINANTS OF MERGERS AND ACQUISITIONS WAVES

Vancea Mariana

University of Oradea Faculty f Economics

http://steconomiceuoradea.ro/anale/volume/2012/n2/055.pdf

 

 

DRIVERS OF MERGER WAVES A Revisit

Soegiharto

https://journal.ugm.ac.id/index.php/gamaijb/article/viewFile/5586/4557

 

 

Business Cycle and Aggregate Industry Merger

Srdan Komlenovic1, Abdullah Mamun2 & Dev Mishra2

University of Saskatchewan

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.527.8260&rep=rep1&type=pdf

 

 

Are There Waves in Merger Activity After All?

Dennis L. Gärtner and Daniel Halbheer

August 2008

ftp://ftp.repec.org/opt/ReDIF/RePEc/iso/ISU_WPS/92_ISU_full.pdf

 

 

Strategic merger waves: A theory of musical chairs

Flavio Toxvaerd

Journal of Economic Theory 140 (2008) 1 – 26

 

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.557.4982&rep=rep1&type=pdf

Business Investments and Low Interest Rates

Business Investments and Low Interest Rates

 

Longstanding IS-LM macroeconomic framework says that low interest rates should result in higher investment (as the cost of capital for investments declines).  However, in practice it is not true.  Business Investment also depends on many other factors such as projections for economic growth, market growth,  and Industry/sector growth (in which a company operates).  Low Interest rates also indicate low economic growth environment.  In a low growth environment, having poor projections of future cash flows from new investments, companies can not justify domestic Investments if financial hurdle rates are not met.  

Corporations also may have attractive options for investment outside the country.  Free Trade agreements allow for business investments to move overseas for getting access to growing markets or for cost cutting reasons such as labor costs.

Instead of Investing in new capacity, companies are paying dividends, and buying back shares to boost share prices and doing acquisitions. Companies are using their own cash retained from earnings to pay dividends, buyback shares, and in some cases doing acquisitions. Debt-financed acquisitions are done through raising capital from capital markets.

Companies do not need to grow by new fixed investments when they can grow by acquiring other companies. Organic growth is the process of business expansion by increased output, customer base expansion, or new product development, as opposed to mergers and acquisitions, which is inorganic growth. Organic growth typically excludes the impact of foreign exchange.  

There has been spectacular M&A activity in 2014, 2015 and is continuing in 2016.  

In low economic growth and low interest rate environment, it may make more sense to grow by inorganic growth.  The justification for M&A is usually the combination of reduced costs of doing business and increased revenue from greater market share.   After completion of acquisition, acquiring company management may decide to rationalize business units – closing inefficient plants, laying off employees, combining overlapping internal corporate services departments.  These decisions depend on the type of M&A strategy.

Economists need to pay attention to these trends as well.  At present, there is no discussion of M&A activity in Economic Policy discourse among Economists and Policy makers.

 

Wall street data charts showing trends in Business Investments

na-cm077_resear_16u_20161026161806na-ck534_bizinv_16u_20160615183306

 

From  Jeff Cox / CNBC.com November 17 2016

Fed Chair Janet Yellen and her colleagues for quite some time have been bemoaning the low levels of business investment.

Pressed Thursday to explain why this has been the case, the central bank chief told Congress she wasn’t sure, but she denied it had anything to do with the Fed’s cheap-money policies of the past eight years.

“It’s not clear in my mind why it is that investment spending has been as weak as it is,” she told the Joint Economic Committee. “Initially, we had an economy with a lot of excess capacity. Firms were clearly operating without enough sales to justify a need to invest in additional capacity, and more recently with the economy moving toward full employment, we would expect to see investment spending pick up, and it’s not obvious exactly why it hasn’t picked up.”

Sen. Bill Cassidy, R-La., suggested that the fault may lie in what the Fed has done. Specifically, he pointed to the central bank’s quantitative easing measures that saw the Fed’s balance sheet surge to $4.5 trillion largely on three rounds of bond buying.

Faced with the uncertainty of returns from capital expenditures and the near-certainty of returns on assets like stocks and bonds during what Cassidy called “easy money” QE programs, businesses opted for the latter, he said.

“I wouldn’t agree that the Fed’s monetary policy has hampered business investment or been a negative factor,” Yellen responded. “I’m not aware of any evidence that suggests that it is.”

She explained that productivity has been on the decline since companies started reversing bare-bones employment levels during the financial crisis. However, that has not been met with business investment, in part because companies don’t believe it “will produce returns that justify those investments,” Yellen said.

 

From Moody.com

Moody’s: US non-financial corporates’ cash pile increases to $1.68 trillion, tech holding the lead

Global Credit Research – 20 May 2016

New York, May 20, 2016 — US non-financial companies rated by Moody’s held $1.68 trillion in cash at the end of 2015, up 1.8% from $1.65 trillion the year prior, Moody’s Investors Services says in a new report. The top 50 holders of cash account for $1.14 trillion of the total cash pile, and entry to the top 50 list now requires $6.12 billion in cash.

“The top four cash-heavy US industries remain technology, healthcare/pharmaceuticals, consumer products, and energy,” says Richard Lane, a Moody’s Senior Vice President. These four industries currently hold a record $1.3 trillion, or 77% of total corporate cash and have accounted for more than 72% of the total every year since 2007.

The top five cash holders are Apple, Microsoft, Google, Cisco Systems and Oracle, Moody’s says in “US Non-Financial Companies: Cash Pile Grows 1.8% to $1.68 Trillion; Tech Extends Lead Over Other Sectors.”

Apple held $215.7 billion in total cash for the period. The company has held the top spot as cash king since 2009.

“While the concentration of cash among the top-rated cash holders continues to grow, so too has the portion held by the technology sector, which accounted for a record 46% of total cash in 2015, up from 41% in 2014,” Lane says.

Moody’s expects the technology sector cash concentration will grind higher over the next year because of the sector’s strong cash flow generation and despite stronger returns of capital to shareholders. The technology sector generated 63% of the total rated non-financial free cash flow in 2015, up from 37% in 2007.

For the top 50, capital spending fell by 3% to $885 billion, and net share buybacks fell 7% to $269 billion. Dividends increased by 4% to a record high of $404 billion, while acquisition spending increased 43%, to a record $401 billion.

For the first time since 2012, cash coverage of aggregate debt maturities over the next five years fell below 100% to 93% at the end of 2015.

In 2016, Moody’s expects aggregate spending on capital investments, dividends, acquisitions and share buybacks to again approximate $1.9 trillion.

 

From Wall Street Journal

mi-cp973_divide_16u_20160603184210

 

From DealLogic

mw-dn118_ma_acq_20150602090958_mg

 

From M&A experts weigh in on deals for 2017

manda3manda2017

 

From  US M&A market on a high

us-ma-2015

From IMAA

usmabestusmabest2

 

Key ideas/issues for M & A:  

Why grow through M & A activities ?

  • Limited organic growth options
  • Need to address the transformation in the marketplace/existing business models
  • Availability of credit on favorable terms
  • Large Cash reserves/commitments
  • Shifting consumer demands
  • Improving Equity markets
  • Opportunities in emerging markets

What are concerns?

  • Slow growth environment
  • Lack of suitable targets
  • Record stock prices
  • Geopolitical risks
  • Others
  • Constrained Consumer Demand
  • Regulatory Considerations
  • Rising Interest Rates

 

 

Key terms:

  • Return on Investment (ROI)
  • Return on Invested Capital ( ROIC)
  • Internal Rate of Return (IRR)
  • Weighted Average Cost of Capital (WACC)
  • Economic Value added (EVA)
  • Return on Assets (ROA)
  • Return on Equity (ROE)
  • Net Present Value (NPV)
  • Compound Annual Growth Rate (CAGR)
  • Capital Expenditures ( CAPEX)
  • Corporate Savings Glut
  • Business Fixed Investments
  • Share Buybacks
  • DIvidends
  • Acquisitions
  • NAFTA
  • TPP
  • TTIP
  • International Investment Position (IIP)
  • Free Trade
  • Direct Investment Position (FDI)
  • Trade Flows
  • Current Account
  • Capital Account
  • Organic Growth
  • Inorganic Growth

 

 

Key Sources of Research:

 

Business Investment in the United States: Facts, Explanations, Puzzles, and Policies

Remarks by Jason Furman Chairman, Council of Economic Advisers

September 30, 2015

 

https://obamawhitehouse.archives.gov/sites/default/files/page/files/20150930_business_investment_in_the_united_states.pdf

http://www.progressivepolicy.org/wp-content/uploads/2015/09/2015.09.30-Jason-Furman_Business-Investment-in-US-Facts-Explanations-Puzzles-Policies.pdf

 

 

Firms’ Investment Decisions and Interest Rates

Kevin Lane and Tom Rosewall

http://www.rba.gov.au/publications/bulletin/2015/jun/pdf/bu-0615-1.pdf

 

 

Investing when interest rates are low

By Timothy M. Koller, Jiri Maly, and Robert N. Palter

http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/investing-when-interest-rates-are-low

 

 

Are low-interest rates contributing to low business investment?

By Nick Bunker

http://equitablegrowth.org/equitablog/are-low-interest-rates-contributing-to-low-business-investment/

 

 

Why isn’t Investment More Sensitive to Interest Rates: Evidence from Surveys

Steve A. Sharpe and Gustavo A. Suarez

2014

https://www.federalreserve.gov/econresdata/feds/2014/files/201402r.pdf

 

 

Why Aren’t Low Rates Working? Blame Dividends

Since the Federal Reserve took rates to near zero, companies have boosted buybacks 194%

http://www.wsj.com/articles/why-arent-low-rates-working-blame-dividends-1465119005

 

 

Low Interest Rates Are Hurting Growth

http://www.forbes.com/sites/realspin/2016/10/04/low-interest-rates-are-hurting-growth/#5e9ccf813a2b

 

 

Secular Stagnation and Returns on Capital

Paul Gomme,  B. Ravikumar, Peter Rupert,

https://files.stlouisfed.org/research/publications/es/15/ES_19_2015-08-18.pdf

 

 

The Return to Capital and the Business Cycle

Gomme, Paul, B. Ravikumar, and Peter C. Rupert, 2006.

Federal Reserve Bank of Cleveland, Working Paper no. 06-03.

https://www.clevelandfed.org/en/newsroom-and-events/publications/working-papers/working-papers-archives/2006-working-papers/wp-0603-the-return-to-capital-and-the-business-cycle.aspx

 

 

Long-term investment, the cost of capital and the dividend and buyback puzzle

Adrian Blundell-Wignall and Caroline Roulet

https://www.oecd.org/finance/Long-term-investment_CapitalCost-dividend-buyback.pdf

 

 

The “Search for Yield” and Business Investment

By Jason M. Thomas

https://www.carlyle.com/sites/default/files/market-commentary/productivity_slowdown_may2016_final.pdf

 

 

Infrastructure versus other investments in the global economy and stagnation hypotheses: What do company data tell us?

Adrian Blundell-Wignall and Caroline Roulet*

https://www.oecd.org/investment/Infrastructure-versus-other-investments-Global-economy-Stagnation-hypotheses.pdf

 

 

(Why) Is investment weak?

Ryan Banerjee Jonathan Kearns Marco Lombardi

http://www.bis.org/publ/qtrpdf/r_qt1503g.pdf

 

 

The Fed Has Hurt Business Investment

by Michael Spence, Kevin Warsh

http://www.hoover.org/research/fed-has-hurt-business-investment

 

 

FRED data series on Savings and Investments

https://fred.stlouisfed.org/categories/112

 

 

Weak Business Investment, Lower Neutral Rate Impacting Each Other

http://www.theepochtimes.com/n3/2160321-weak-business-investment-lower-neutral-rate-impacting-each-other/

 

 

The Corporate Saving Glut in the Aftermath of the Global Financial Crisis

Joseph W. Gruber and Steven B. Kamin

https://www.federalreserve.gov/econresdata/ifdp/2015/files/ifdp1150.pdf

 

 

Rising Intangible Capital, Shrinking Debt Capacity, and the US Corporate Savings Glut

Antonio Falato Dalida Kadyrzhanova Jae W. Sim

November 2012. This version: June 2013

http://www.cepr.org/sites/default/files/events/papers/5599_KADYRZHANOVA_Cover%20-%20Rising%20Intangible%20Capital,%20Shrinking%20Debt%20Capacity%20and%20the%20US%20Corporate%20Savings%20Glut.pdf

 

 

Corporate Profits and Business Fixed Investment: Why are Firms So Cautious about Investment?

Naoya Kato and Takuji Kawamoto

April 2016

https://www.boj.or.jp/en/research/wps_rev/rev_2016/data/rev16e02.pdf

 

 

The Evolution of Corporate Cash

John R. Graham
Mark T. Leary

Draft: February 2015

http://www.rhsmith.umd.edu/files/Documents/Departments/Finance/seminarspring2015/graham.pdf

 

 

Adverse Effects of Ultra-Loose Monetary Policies on Investment, Growth and Income Distribution

Andreas Hoffmann & Gunther Schnabl

http://www.savings-banks.com/SiteCollectionDocuments/Savings%20and%20Investment%20During%20the%20Great%20Depression%20and%20the%20Recent%20Global%20Crisis.pdf

 

 

NAFTA at 20

AFL-CIO

http://www.aflcio.org/content/download/121921/3393031/March2014_NAFTA20_nb.pdf

 

 

The North American Free Trade Agreement (NAFTA)

 

M. Angeles Villarreal

Ian F. Fergusson

April 16, 2015

https://fas.org/sgp/crs/row/R42965.pdf

 

 

 

NAFTA Revisited

PIIE

http://big.assets.huffingtonpost.com/NAFTA_Revisited_Text.pdf

 

Direct Investment Positions for 2015 Country and Industry Detail

 

By Derrick T. Jenniges and James J. Fetzer

July 2016

 

http://www.bea.gov/scb/pdf/2016/07%20July/0716_direct_investment_positions.pdf

 

 

Activities of U.S. Multinational Enterprises in the United States and Abroad

Preliminary Results From the 2014 Benchmark Survey

 

http://www.bea.gov/scb/pdf/2016/12%20December/1216_activities_of_us_multinational_enterprises.pdf

 

 

2015: A Merger Bonanza
Nearly $5 trillion worth of deals were announced last year. Why do so many big companies want team up?

http://www.theatlantic.com/business/archive/2016/01/2015-mergers-acquisitions/423096/

 

 

M&A experts weigh in on deals for 2017

https://info.kpmg.us/ma-survey-2017.html?gclid=Cj0KEQiAkO7CBRDeqJ_ahuiPrtEBEiQAbYupJaJUqUI61s1m-kFVDnT112-3ocH1SdVfcCxiBiNX614aAuvj8P8HAQ

 

 

 

The Federal Reserve’s Impact on the US M&A Market: An Empirical Examination

Sebastian v. Boetticher

Spring 2015

 

http://www.cob.calpoly.edu/undergrad/files/2015/09/Boetticher.pdf

 

 

M&A Statistics

IMAA offers extensive and up-to-date information, data, research on M&A and Mergers & Acquisitions statistics

https://imaa-institute.org/mergers-and-acquisitions-statistics/

 

 

Hearing: The Economic Outlook

Janet Yellen on November 16 2016 speaking at Joint Economic Committee

Listen/view at 1:33:00 her comments on Business Investments

The Decline in Long Term Real Interest Rates

The Decline in Long Term Real Interest Rates

 

Causes of Decline in Long term Real Interest Rates

  • Secular Stagnation – lack of aggregate demand
  • Debt Overhang
  • Shortage of Safe assets
  • Supply side issues
  • Income Inequality
  • Deleveraging
  • Low productivity growth
  • Demographics
  • Demassification of economy
  • Increased Savings
  • Decreased Investments
  • Low foreign economic Growth
  • Liquidity Trap
  • Global Savings Glut

 

From Are Low Rates Natural?

Causes: Propensity to invest

Lower propensity to invest (Gordon, Summers)

  • Demographics
  • Slower TFP growth
  • Shift in capital intensity of production
  • Falling relative price of capital goods
  • Post-crisis effects

Causes: Propensity to save

Higher propensity to save (Bernanke)

  • Demography
  • High savings in China
  • Chinese financial integration
  • Income inequality
  • Post-crisis effects

Causes: Asset demands/supplies

Higher demand for safe assets

  • Emerging-economy reserve accumulation
  • Heightened “disaster” risk (Barro)
  • Tightening of bank liquidity regulation
  • Central bank asset purchases (QE)

Lower supply of safe assets (Caballero-Farhi)

  • Crisis revealed many AAA-rated ABS not safe
  • Euro-area debt crisis revealed some advanced- economy sovereign debt not safe
  • …But lot of issuance by “safe” sovereigns too!

 

Key Terms:

  • Nominal Rates vs Real Rates ( Inflation adjusted)
  • Short term rates vs Long Term Rates
  • Yield Curve or Term Structure
  • Neutral Interest Rate vs Natural Interest Rate vs Equilibrium Interest Rate
  • Fed Funds Rate vs Policy Rate vs Target Rate
  • T-Bills, T-Notes, T-Bonds
  • TIPS ( Treasury Inflation protected Securities )
  • Overnight Bank Funding Rate

 

From  Real Interest Rates Over the Long Run

 

Real interest rates since the 1960s have been characterized by three broad long-run trends: (1) rates have declined across numerous countries since the 1980s, (2) long-run average real interest rates are near their low for the 60-year period we examine and (3) over the past quarter century, long-run interest rates have converged internationally, consistent with an increasingly financially integrated world.

These findings have four implications.

• First, real interest rates were declining long before the global financial crisis of 2007- 09 and its aftereffects and well before the fizzling of the IT boom.

• Second, the likelihood of nominal interest rates hitting the zero lower bound has increased compared with the likelihood prior to the Great Recession.

• Third, increasing financial integration may lead to even closer international rate convergence.

• Fourth, there was a sustained increasing trend in long-run real interest rates prior to the 1980s, which suggests that the current downward trend could also reverse.

Finally, since the 1980s, the trend in global fixed investment is downward. Coupled with our main finding of the declining long-run real interest rates, this suggests that forces leading to lower investment demand have been relatively more important than those leading to increased desired saving. Put differently, while our evidence is not inconsistent with the global saving glut hypothesis, it indicates that in addition to a saving glut, there must have been forces that reduced global investment demand, and these forces must have been more important.

 

Key Sources of Research:

 

Long Term Interest Rates

https://www.whitehouse.gov/sites/default/files/docs/interest_rate_report_final_v2.pdf

 

 

The Decline in Long-Term Interest Rates

JULY 14, 2015

MAURICE OBSTFELD AND LINDA TESAR

https://www.whitehouse.gov/blog/2015/07/14/decline-long-term-interest-rates

 

 

Selected Interest Rates (Daily) – H.15

https://www.federalreserve.gov/releases/h15/

 

Effective Fed Funds Rate

https://fred.stlouisfed.org/series/FEDFUNDS

 

10 Yrs T Bonds Constant Maturity

https://fred.stlouisfed.org/series/DGS10

 

3 Months T Bills 

https://fred.stlouisfed.org/series/TB3MS

https://fred.stlouisfed.org/release?rid=18

 

 

Low long-term rates: bond bubble or symptom of secular stagnation?

Grégory Claeys

http://bruegel.org/wp-content/uploads/2016/09/PC_15_16.pdf

 

 

Low for Long? Causes and Consequences of Persistently Low Interest Rates

Charles Bean

Christian Broda

Takatoshi Ito

Randall Kroszner

 

http://voxeu.org/sites/default/files/file/Geneva17_28sept.pdf

 

 

Low long-term interest rates as a global phenomenon

Peter Hördahl, Jhuvesh Sobrun and Philip Turner

 

http://www.bis.org/publ/work574.pdf

 

 

Low real interest rates: Causes and outlook

 

https://www.allianz.com/v_1453369613000/media/economic_research/publications/working_papers/en/WPRealzinse.pdf

 

 

Projecting the Long-Run Natural Rate of Interest

BY KEVIN J. LANSING

http://www.frbsf.org/economic-research/files/el2016-25.pdf

 

 

Secular drivers of the global real interest rate

Lukasz Rachel and Thomas D Smith

 

http://www.centreformacroeconomics.ac.uk/Discussion-Papers/2016/CFMDP2016-05-Paper.pdf

 

 

PERSPECTIVES ON GLOBAL REAL INTEREST RATES

IMF

2014

 

https://www.imf.org/external/pubs/ft/weo/2014/01/pdf/c3.pdf

 

 

Secular Stagnation: Facts, Causes, and Cures

Coen Teulings and Richard Baldwin

 

http://scholar.harvard.edu/files/farhi/files/book_chapter_secular_stagnation_nov_2014_0.pdf

 

 

Crises in Economic Thought, Secular Stagnation, and Future Economic Research

Lawrence Summers

http://www.nber.org/chapters/c13788.pdf

 

 

The decline in long-term interest rates

http://johnhcochrane.blogspot.com/2015/08/the-decline-in-long-term-interest-rates.html

 

 

Measuring the Natural Rate of Interest: International Trends and Determinants

Kathryn Holston and Thomas Laubach

John C. Williams

June 2016

 

http://piketty.pse.ens.fr/files/HolstonLaubachWilliams2016.pdf

 

 

 

Measuring the Natural Rate of Interest Redux

Thomas Laubach John C. Williams

October 2015

http://www.frbsf.org/economic-research/files/wp2015-16.pdf

 

 

 

Real Interest Rates Over the Long Run

Decline and convergence since the 1980s

Kei-Mu Yi

Jing Zhang

 

https://www.minneapolisfed.org/~/media/files/pubs/eppapers/16-10/kei-mu-yi-epp.pdf

 

 

The Equilibrium Real Funds Rate: Past, Present and Future

James D. Hamilton Ethan S. Harris Jan Hatzius Kenneth D. West

 

http://econweb.ucsd.edu/~jhamilto/USMPF_2015.pdf

 

 

Why Are Long-Term Interest Rates So Low?

BY MICHAEL D. BAUER AND GLENN D. RUDEBUSCH

http://www.frbsf.org/economic-research/files/el2016-36.pdf

 

 

Calculating the Natural Rate of Interest: A Comparison of Two Alternative Approaches

By Thomas A. Lubik and Christian Matthes

2015

 

https://www.richmondfed.org/-/media/richmondfedorg/publications/research/economic_brief/2015/pdf/eb_15-10.pdf

 

 

 

Monetary Policy in a Low R-star World

BY JOHN C. WILLIAMS

http://www.frbsf.org/economic-research/files/el2016-23.pdf

 

 

Does Slower Growth Imply Lower Interest Rates?

BY SYLVAIN LEDUC AND GLENN D. RUDEBUSCH

 

http://www.frbsf.org/economic-research/files/el2014-33.pdf

 

 

Interest Rates and Economic Growth: Are They Related?

Barry P. Bosworth

 

https://www.brookings.edu/wp-content/uploads/2016/06/interest_rates_growth_bosworth.pdf

 

 

Why are interest rates so low?

Ben S. Bernanke

https://www.brookings.edu/blog/ben-bernanke/2015/03/30/why-are-interest-rates-so-low/

 

 

Why are interest rates so low, part 2: Secular stagnation

Ben S. Bernanke

https://www.brookings.edu/blog/ben-bernanke/2015/03/31/why-are-interest-rates-so-low-part-2-secular-stagnation/

 

 

Why are interest rates so low, part 3: The Global Savings Glut

Ben S. Bernanke

https://www.brookings.edu/blog/ben-bernanke/2015/04/01/why-are-interest-rates-so-low-part-3-the-global-savings-glut/

 

 

Why are interest rates so low, part 4: Term premiums

Ben S. Bernanke

https://www.brookings.edu/blog/ben-bernanke/2015/04/13/why-are-interest-rates-so-low-part-4-term-premiums/

 

 

Low Equilibrium Real Rates, Financial Crisis, and Secular Stagnation

Lawrence H. Summers

http://www.hoover.org/sites/default/files/across-the-great-divide-ch2.pdf

 

 

The challenge of low real interest rates for monetary policy

Lecture by Vítor Constâncio, Vice-President of the ECB,

Macroeconomics Symposium at Utrecht School of Economics, 15 June 2016

https://www.ecb.europa.eu/press/key/date/2016/html/sp160615.en.html

 

 

Focus on Low Real Interest Rate Might Be Misplaced

By Jonas Crews, Kevin L. Kliesen and Christopher J. Waller

 

https://www.stlouisfed.org/~/media/Publications/Regional%20Economist/2016/January/real_interest_rate.pdf

 

 

Determinants of long-term interest rates

 

Ona Ciocyte Sander Muns Marcel Lever

 

https://www.cpb.nl/sites/default/files/omnidownload/CPB-Background-Document-25may2016-Determinants-of-long-term-interest-rates_0.pdf

 

 

Ultra-low or Negative Yields on Euro-Area Long-term Bonds: Causes and Implications for Monetary Policy

Daniel Gros

 

https://www.ceps.eu/system/files/D%20Gros%20on%20Ultra-low%20or%20Negative%20Yields%20on%20Euro-Area%20Long-term%20Bonds%20-%20CEPS%20WD.pdf

 

 

The Age of Secular Stagnation: What It Is and What to Do About It

February 15, 2016

published in Foreign Affairs

http://larrysummers.com/2016/02/17/the-age-of-secular-stagnation/

 

 

Global Savings, Investment, and World Real Interest Rates

Brigitte Desroches and Michael Francis

2006-2007

 

http://www.bankofcanada.ca/wp-content/uploads/2010/06/desroches.pdf

 

 

Causes and consequences of low interest rates

Jean-Pierre Danthine

Vice Chairman of the Governing Board
Swiss National Bank

https://www.snb.ch/en/mmr/speeches/id/ref_20131114_jpd/source/ref_20131114_jpd.en.pdf

 

 

Are Low Rates Natural?

Charles Bean

London School of Economics

Monetary and Financial Policy Conference London 25 September 2015

http://www.mmf.ac.uk/images/documents/2015/Sept15Conf/MMF_Bean_slides.pdf

 

 

Why Are Interest Rates So Low?

Marco Del Negro, Marc Giannoni, Matthew Cocci, Sara Shahanaghi, and Micah Smith

http://libertystreeteconomics.newyorkfed.org/2015/05/why-are-interest-rates-so-low.html#.VlR1ACvYj2g

 

 

Normalizing Monetary Policy When the Neutral Interest Rate Is Low

Lael Brainard

 

https://www.federalreserve.gov/newsevents/speech/brainard20151201a.pdf

Low Interest Rates and Banks Profitability: Update – December 2016

Low Interest Rates and Banks Profitability: Update – December 2016

 

This post is an update to my previous post published in May 2016.  You can access it below.

Impact of Low Interest Rates on Bank’s Profitability

There have been several developments in this research area since my post.  I list them below.

 

Sources of Research:

BIS Annual Report released in 2015 discussed causes and concequenses of Persistent Low Interest rates.

BIS Annual Report 2014-15

 

IMF released Global Financial Stability Report in October 2016 which discussed in Chapter 1 causes and effects of Low interest rates.

Global Financial Stability Report October 2016

 

The Office of Financial Research of the USA Department of Treasury released its Annual report 2015 in which it warned of impact of low interest rates on Banks and other financial Institutions.

US Office of Financial Research Annual Report 2015

 

European Central bank released its Financial Stability Review report in November 2016 in which low interest rates environment was discussed.

ECB Financial Stability Review November 2016

 

Deutsche bank had issued its research note in 2013 detailing how Japanese Financial Institutions have coped with Low Interest Rates Environment.

Deutche Bank Research: Ultra Low Interest Rates: How Japanese Banks have coped?

 

Deutsche bank had issued its research note in 2012 on how low interest rates are pressuring US banks net interest margins.

DB Research: Low Interest rates Pressuring US Banks Margins

 

Stanley Fischer Vice Chairman of Federal Reserve Board gave his remarks recently on the Long Term Challenges for the US Economy in which he commented on impact of low interest rates on financial stability.

FRB/Stan Fischer: Longer-Term Challenges for the U.S. Economy

 

Stanley Fischer Vice Chairman of Federal Reserve Board gave his remarks recently on the causes of Low interest rates and Implications.

FRB/Stan Fischer: Why Are Interest Rates So Low? Causes and Implications

 

Stanley Fischer Vice Chairman of Federal Reserve Board gave his remarks recently on the Low interest rates.

FRB/Stan Fischer: Low Interest Rates

 

Riksbank of Sweden published paper on how do low and negative interest rates affect banks’ profitability.

MONETARY POLICY REPORT APRIL 2016

To push inflation up, the Riksbank and several other central banks have introduced negative interest rates. Critics say that negative rates counteract their purpose in that they are said to squeeze banks’ profitability, which could then lead to higher lending rates and lower credit supply. This discussion has arisen in the euro area in particular, where banks are already burdened with low profitability. The Riksbank’s assessment is that the overall effect of negative interest rates on banks’ profitability is limited and may even be positive, and that the function of Swedish banks in the monetary policy transmission mechanism is maintained even at a negative policy rate level.

Riksbank/Sweden: How do low and negative interest rates affect banks’ profitability?

 

Central Bank of Columbia has recently published article

The risks of low interest rates

Leonardo Gambacorta

 

The risks of low interest rates

 

European Parliament’s Committee on Economic and Monetary Affairs.

Karl Whelan, University College Dublin

The ECB’s QE announcement has made it clear they intend to keep interest rates in the euro area at very low levels for a long period of time. This policy should help to boost economic growth and move inflation back towards the ECB’s target. However, every economic policy produces winners and losers and certain sectors of the economy will be negatively affected by this policy. This paper presents evidence on sectoral balance sheets and household asset holdings to explain how low interest rates affect various groups. It also discusses the impact a prolonged period of low interest rates has on different types of financial institutions. The paper concludes that, at present, the risks of low interest rates provoking a new financial crisis are low.

Low Interest Rates and Financial Stability

 

Interesting Blog on Bruegel

Eurozone QE and bank profitability: Why it is too early to taper

In the eyes of the critics, the quantitative easing programs have been of little help to growth and inflation and have instead been an attack on savers, undermining the profitability of banks and insurances. Do these arguments stand scrutiny?

Eurozone QE and bank profitability: Why it is too early to taper

 

Interesting Blog on Bruegel

What impact does the ECB’s quantitative easing policy have on bank profitability?

This Policy Contribution shows that the effect of the ECB’s QE programme on bank profitability has not yet had a dramatically negative effect on bank operations.

What impact does the ECB’s quantitative easing policy have on bank profitability?

 

At the first ECB ESRB ( European Systemic Risk Board) conference Elena Carletti gave a overview of the work of the task force on Low Interest Rates and Financial Stability.

September 2016

Low interest rates and implications for financial stability – A discussion

 

See the Youtube video of conference presentations at the ECB/ESRB on Low Interest Rates and Implications for Financial Stability.

ECB: First ESRB annual conference – Low interest rates and the implications of financial stability

 

See Youtube video of Welcome Address by Mario Draghi, Chair of the ESRB

ECB: First ESRB annual conference – Welcome address: Mario Draghi, Chair of the ESRB

 

ECB/ESRB Taskforce report on Macro-prudential Policy issues arising from Low Interest rates and Structural changes in the EU Financial System.

November 28, 2016

ECB/ESRB: Macro prudential Policy Issues Arising from Low Interest Rates and Structural Changes in the EU Financial System

 

ECB/ESRB Taskforce report on Macro-prudential Policy issues arising from Low Interest rates and Structural changes in the EU Financial System.

There are several Annex of the report which can be downloaded from the link below.

The ESRB publishes a report on the macroprudential policy issues arising from low interest rates and structural changes in the EU financial system

 

Mario Draghi gave his remarks at the EU Parliament about the work of ESRB and the Taskforce report.

November 28, 2016

Introductory statement by Mario Draghi, Chair of the ESRB, Brussels, 28 November 2016

Hierarchical Planning: Integration of Strategy, Planning, Scheduling, and Execution

Hierarchical Planning: Integration of Strategy, Planning, Scheduling, and Execution

In Manufacturing environments, there are hierarchical levels of planning and analysis.

  • Strategic – Tactical – Operational
  • Long Term – Medium Term – Short Term
  • Corporate – Business – Functional
  • Aggregate Plans – Detailed Schedules – Execution Results
  • Time Buckets – Gantt Charts – Plan Vs Actuals
  • Forecasts – Plans – Schedules – Results
  • Strategy – Planning – Execution
  • Time Series – Optimization-Simulation-Statistics
  • Structural – Cyclical – Sequential

 

slide_18

Beyond this, there are other analytical approaches:

  • Industry Analysis,
  • Scenario Planning,
  • Environmental Scanning,
  • Sectorial Analysis
  • Macro-Economics

 

From Integration of multi-scale planning and scheduling problems

A supply chain may be defined as an integrated process wherein various entities work together in an effort to meet the objectives of each entity as well as the common objectives of the overall supply chain. It is theoretically possible and preferable to build mathematical models for entire supply chains including all interacting strategic and operational decisions throughout the supply chain. Such monolithic models will not be consistent with the nature of the managerial decision process or practical due to computational complexity of models, data and solution techniques. Mathematical programming is most commonly used to formulate planning and scheduling problems within the process industry. The problems are combinatorial in nature which makes them very difficult to solve and it is vital to develop efficient modelling strategies, mathematical formulations and solutions methods. One of the major difficulties in building mathematical programming models is to keep the size within reasonable limits without sacrificing accuracy. To solve full-scale real-world planning and scheduling problems efficiently, simplification, approximation or aggregation strategies are most often necessary (Grunow et al., 2002, Engell et al., 2001).

It is widely recognized that the complex problem of what to produce and where and how to produce it is best considered through an integrated, hierarchical approach which also acknowledges typical corporate structures and business processes (Shah, 1999). Production planning and scheduling in a typical enterprise involves managers at various echelons within the organization and the decisions that need to be made differ by scope and time horizon and the underlying input information differs by its degree of certainty and aggregation. The decisions also need to be made with different timing and frequency and according to the correct sequence which even further makes the case for an integrated hierarchical approach.

The literature often describes problems solved individually but less often the integration of different problems or the integration of different detail levels of the same problems. An example of an integrated strategic and operational planning problem is described by Kallrath (2002) and an investigation on the integration of long-term, mid-term and short-term planning operations through a common data model is reported by Das et al. (2000). Some typical economical benefits of integrated decision making are listed by Shobrys and White (2002) who conclude that the major challenges in integrating planning, scheduling and control systems are involved in issues like changing human and organizational behavior rather than technical issues. The general conclusion made in the literature is that the integration of decisions with synchronized models is desirable but at the same time it is very difficult to solve such models efficiently.

 

Key Sources of Research:

Bodington, Charles E., and Thomas E. Baker.

“A history of mathematical programming in the petroleum industry.”

Interfaces 20.4 (1990): 117-127.

 

Baker, Thomas E., and Leon S. Lasdon.

“Successive linear programming at Exxon.”

Management science 31.3 (1985): 264-274.

 

Baker, Thomas E.

“Petro-chemical industry.”

Encyclopedia of Operations Research and Management Science. Springer US, 2001. 612-614.

 

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Harvey J. Greenberg

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Supply Chain Planning Optimization 

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MIMI Brings OR Tools Together

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Christos T. Maravelias and Charles Sung

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HIERARCHICAL INTEGRATION OF PRODUCTION PLANNING AND SCHEDULING

Arnoldo C. Hax and Harlan C. Meal

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Discrete Optimization Methods and their Role in the Integration of Planning and Scheduling

Ignacio E. Grossmann , Susara A. van den Heever and Iiro Harjunkoski

March 1, 2001

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by Jeremy F. Shapiro

January, 1989

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Stephan Kreipl • Michael Pinedo

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THE CORPORATE STRATEGIC PLANNING PROCESS

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1983

 

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W.G.M.M. Rutten

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Combined Strategic and Operational Planning – An MILP Success Story in Chemical Industry

Josef Kallrath

 

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