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Downward Interest Rate Rigidity

Author

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  • Jean-Guillaume Sahuc

    (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

  • Grégory Levieuge

Abstract

Empirical evidence suggests that bank lending rates are downward rigid: banks tend to adjust their rates more slowly and less completely to short-term market rates decreases than to increases. We investigate the macroeconomic consequences of this downward interest rate rigidity by introducing asymmetric bank lending rate adjustment costs in a macrofinance dynamic stochastic general equilibrium model. Calibrating the model to the euro area economy, we find that the difference in the initial response of GDP to positive and negative economic shocks of similar amplitude can reach up to 25%. This means that a central bank would have to cut its policy rate much more to obtain a symmetric medium-run impact on GDP. We also show that downward interest rate rigidity is stronger when policy rates are stuck at their effective lower bound, further disrupting monetary policy transmission. These findings imply that neglecting asymmetry in retail interest rate adjustments may yield misguided monetary policy decisions.

Suggested Citation

  • Jean-Guillaume Sahuc & Grégory Levieuge, 2021. "Downward Interest Rate Rigidity," Post-Print hal-03361418, HAL.
  • Handle: RePEc:hal:journl:hal-03361418
    DOI: 10.1016/j.euroecorev.2021.103787
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-03361418
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    1. Downward Interest Rate Rigidity
      by Christian Zimmermann in NEP-DGE blog on 2021-10-11 17:06:39

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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