Dynamics of Yield Gravity and the Money Anxiety Index

Abstract

This paper demonstrates that the prevailing theory on interest rates (Fisher 1930) is incomplete. The study shows that when money anxiety is high, such as during recessionary times, the ability of higher yield to attract term deposits diminishes. The study features an innovative Money Anxiety Index as a mediating variable demonstrating that higher yield does not always attract more money even when risk is not a factor. The implication of the findings is that elevated level of money anxiety hampers the ability of banks to comply with Basal III Net Stable Funding Ratio (NSFR) requirement of one-year-term liquidity.