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A Potential Disadvantage of a Low Interest Rate Policy: the Instability of Banks Liquidity

In: Artificial Economics

Author

Listed:
  • Gianfranco Giulioni

    (University of Chieti-Pescara)

Abstract

This paper joins the strands of literature supporting the idea that monetary policy should consider seriously the behavior of financial institutions. In a number of recent episodes, lowering the interest rate has been ineffective in bringing economies out of unfavorable conditions. We show how a low interest rate policy could have adverse effects that oppose the positive ones for which they are adopted. In particular, banks may choose to finance more risky borrowers who have an higher average return to cancel out the negative effects triggered by a low interest rate on their revenues. This behavior could seriously endanger macroeconomic performances.

Suggested Citation

  • Gianfranco Giulioni, 2009. "A Potential Disadvantage of a Low Interest Rate Policy: the Instability of Banks Liquidity," Lecture Notes in Economics and Mathematical Systems, in: Cesáreo Hernández & Marta Posada & Adolfo López-Paredes (ed.), Artificial Economics, chapter 0, pages 3-14, Springer.
    • Handle: RePEc:spr:lnechp:978-3-642-02956-1_1
    DOI: 10.1007/978-3-642-02956-1_1
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    Cited by:

    1. Giulioni, Gianfranco, 2015. "Policy interest rate, loan portfolio management and bank liquidity," The North American Journal of Economics and Finance, Elsevier, vol. 31(C), pages 52-74.

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