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Incomplete Interest Rate Pass-Through and Optimal Monetary Policy

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  • Teruyoshi Kobayashi

    (Department of Economics, Chukyo University)

Abstract

Many recent empirical studies have reported that the passthrough from money-market rates to retail lending rates is far from complete in the euro area. This paper formally shows that when only a fraction of all the loan rates is adjusted in response to a shift in the policy rate, fluctuations in the average loan rate lead to welfare costs. Accordingly, the central bank is required to stabilize the rate of change in the average loan rate in addition to inflation and output. It turns out that the requirement for loan rate stabilization justifies, to some extent, the idea of policy rate smoothing in the face of a productivity shock and/or a preference shock. However, a drastic policy reaction is needed in response to a shock that directly shifts retail loan rates, such as an unexpected shift in the loan rate premium.

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Bibliographic Info

Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 4 (2008)
Issue (Month): 3 (September)
Pages: 77-118

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Handle: RePEc:ijc:ijcjou:y:2008:q:3:a:4

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Citations

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Cited by:
  1. Matthieu Darracq Pariès & Christoffer Kok Sørensen & Diego Rodriguez-Palenzuela, 2011. "Macroeconomic Propagation under Different Regulatory Regimes: Evidence from an Estimated DSGE Model for the Euro Area," International Journal of Central Banking, International Journal of Central Banking, vol. 7(4), pages 49-113, December.
  2. Totzek, Alexander & Wohltmann, Hans-Werner, 2010. "Barro-Gordon revisited: reputational equilibria in a New Keynesian model," Economics Working Papers 2010,04, Christian-Albrechts-University of Kiel, Department of Economics.
  3. Walentin, Karl, 2013. "Business Cycle Implications of Mortgage Spreads," Working Paper Series 275, Sveriges Riksbank (Central Bank of Sweden), revised 01 Mar 2014.
  4. Ippei Fujiwara & Yuki Teranishi, 2009. "Financial Stability in Open Economies," IMES Discussion Paper Series 09-E-09, Institute for Monetary and Economic Studies, Bank of Japan.
  5. Giuseppe Ciccarone & Francesco Giuli & Danilo Liberati, 2012. "The effects of monetary policy shocks in credit and labor markets with search and matching frictions," Working Papers 151, University of Rome La Sapienza, Department of Public Economics.
  6. Fujiwara, Ippei & Teranishi, Yuki, 2011. "Real exchange rate dynamics revisited: A case with financial market imperfections," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1562-1589.
  7. F. Verona & M. M. F. Martins & I. Drumond, 2013. "(Un)anticipated Monetary Policy in a DSGE Model with a Shadow Banking System," International Journal of Central Banking, International Journal of Central Banking, vol. 9(3), pages 78-124, September.
  8. Yuki Teranishi, 2008. "Optimal Monetary Policy under Staggered Loan Contracts," IMES Discussion Paper Series 08-E-08, Institute for Monetary and Economic Studies, Bank of Japan.
  9. Ciccarone, Giuseppe & Giuli, Francesco & Liberati, Danilo, 2014. "Incomplete interest rate pass-through under credit and labor market frictions," Economic Modelling, Elsevier, vol. 36(C), pages 645-657.
  10. Belanger, Gilles, 2014. "Interest Rates Rigidities and the Fisher Equation," MPRA Paper 54705, University Library of Munich, Germany.
  11. Jaromír Beneš & Kirdan Lees, 2010. "Multi-period fixed-rate loans, housing and monetary policy in small open economies," Reserve Bank of New Zealand Discussion Paper Series DP2010/03, Reserve Bank of New Zealand.
  12. Yuki Teranishi, 2013. "Smoothed Interest Rate Setting by Central Banks and Staggered Loan Contracts," CAMA Working Papers 2013-45, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  13. repec:csg:ajrcwp:1306 is not listed on IDEAS
  14. J. Sebastián Becerra & Luis Ceballos & Felipe Córdova & Michael Pedersen, 2009. "Pass-through of Large Changes in Monetary Policy Rate – Evidence for Chile," Working Papers Central Bank of Chile 522, Central Bank of Chile.
  15. Ida, Daisuke, 2014. "Role of financial systems in a sticky price model," Journal of Economics and Business, Elsevier, vol. 72(C), pages 44-57.

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