Applying complexity theory to interest rates: Evidence of critical transitions in the euro area
Jan Willem van den End
DNB Working Papers from Netherlands Central Bank, Research Department
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.
Keywords: interest rates; central banks and their policies; monetary policy (search for similar items in EconPapers)
JEL-codes: E43 E58 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:dnb:dnbwpp:567
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