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Smoothed Interest Rate Setting by Central Banks and Staggered Loan Contracts

  • Yuki Teranishi

We investigate a new source of economic stickiness: namely, staggered loan interest rate contracts under monopolistic competition. The paper introduces this mechanism into a standard New Keynesian model. Simulations show that a response to a financial shock is greatly amplified by the staggered loan contracts though a response to a productivity, cost-push or monetary policy shock is not much affected. We derive an approximated loss function and analyse optimal monetary policy. Unlike other models, the function includes a quadratic loss of the first-order difference in loan rates. Thus, central banks have an incentive to smooth the policy rate.

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Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2013-45.

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Length: 21 pages
Date of creation: Jul 2013
Date of revision:
Handle: RePEc:een:camaaa:2013-45
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