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Is Monetary Policy Always Effective? Incomplete Interest Rate Pass-through in a DSGE Model

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  • Andrew Binning

    ()

  • Hilde C. Bjørnland

    ()

  • Junior Maih

    ()

Abstract

We estimate a regime-switching DSGE model with a banking sector to explain incomplete and asymmetric interest rate pass-through, especially in the presence of a binding zero lower bound (ZLB) constraint. The model is estimated using Bayesian techniques on US data between 1985 and 2016. The framework allows us to explain the time-varying interest rate spreads and pass-through observed in the data. We ?nd that pass-through tends to be delayed in the short run, and incomplete in the long run. All this impacts the dynamics of the other macroeconomic variables in the model. In particular, we ?nd monetary policy to be less e?ective under incomplete pass-through. Furthermore, the behavior of pass-through in the loan rate is di?erent from that of the deposit rate shocks. This creates asymmetric dynamics at the zero lower bound, and incomplete pass-through exacerbates that asymmetry.

Suggested Citation

  • Andrew Binning & Hilde C. Bjørnland & Junior Maih, 2019. "Is Monetary Policy Always Effective? Incomplete Interest Rate Pass-through in a DSGE Model," Working Papers No 09/2019, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
  • Handle: RePEc:bny:wpaper:0081
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    More about this item

    Keywords

    banking sector; incomplete or symmetric interest rate pass-through; DSGE;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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