IDEAS home Printed from https://ideas.repec.org/p/ltv/wpaper/202505.html
   My bibliography  Save this paper

The Economic Impact of the Deposit Interest Rate Adjustment Speed

Author

Listed:
  • Patrick Gruning

    (Latvijas Banka)

Abstract

During the recent monetary policy tightening cycle, the pass-through of monetary policy to interest rates offered by commercial banks and the size of bank profits have attracted substantial attention. In this study, I explore the economic effects of reducing the adjustment speed of monetary policy changes to deposit interest rates, using a suitable New-Keynesian dynamic stochastic general equilibrium model. A lower deposit interest rate adjustment speed increases macroeconomic volatility but decreases the volatility of the credit spread (except in the case of a very low adjustment speed). Bank net interest income and aggregate consumption typically increase relative to a model where the deposit interest rate perfectly tracks the monetary policy rate, while aggregate output and investment dynamics deteriorate. Introducing a tax on the interest income earned by setting deposit interest rates below the monetary policy rate leads to amplified short- and medium-run macroeconomic costs. However, the tax improves long-run economic dynamics.

Suggested Citation

  • Patrick Gruning, 2025. "The Economic Impact of the Deposit Interest Rate Adjustment Speed," Working Papers 2025/05, Latvijas Banka.
    • Handle: RePEc:ltv:wpaper:202505
    as

    Download full text from publisher

    File URL: https://datnes.latvijasbanka.lv/papers/WP_5_2025_EN.pdf
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ltv:wpaper:202505. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Konstantins Benkovskis (email available below). General contact details of provider: https://edirc.repec.org/data/bolgvlv.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.