"Interest rate trap", or: Why does the central bank keep the policy rate too low for too long time?
This paper provides a framework for modeling the risk-taking channel of monetary policy, the mechanism how financial intermediaries’ incentives for liquidity transformation are affected by the central bank’s reaction to financial crisis. Anticipating central bank’s reaction to liquidity stress gives banks incentives to invest in excessive liquidity transformation, triggering an "interest rate trap" - the economy will remain stuck in a long lasting period of sub-optimal,low interest rate equilibrium. We demonstrate that interest rate policy as financial stabilizer is dynamically inconsistent, and the constraint efficient outcome can be implemented by imposing ex ante liquidity requirements.
|Date of creation:||21 Nov 2011|
|Contact details of provider:|| Postal: Postboks 1179 Sentrum, 0107 Oslo|
Phone: +47 22 31 60 00
Fax: +47 22 41 31 05
Web page: http://www.norges-bank.no/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Francesco Giavazzi & Alberto Giovannini, 2010.
"Central Banks and the Financial System,"
NBER Working Papers
16228, National Bureau of Economic Research, Inc.
- Douglas W. Diamond & Raghuram Rajan, 2011.
"Illiquid Banks, Financial Stability, and Interest Rate Policy,"
NBER Working Papers
16994, National Bureau of Economic Research, Inc.
- Douglas W. Diamond & Raghuram G. Rajan, 2012. "Illiquid Banks, Financial Stability, and Interest Rate Policy," Journal of Political Economy, University of Chicago Press, vol. 120(3), pages 552-591.
When requesting a correction, please mention this item's handle: RePEc:bno:worpap:2011_12. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.