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Do Bank-Based Financial Systems Reduce Macroeconomic Volatility by Smoothing Interest Rates?

This paper investigates the business cycle implications of limited pass-through to retail interest rates based on a calibrated sticky price model. Although limited interest rate pass-through can in principle reduce output and inflation volatility at the same time, large reductions in output volatility are likely to be accompanied by a more volatile inflation rate. Limited pass-through gives rise to two counteracting effects: It partially insulates the economy from adverse liquidity shocks and thereby leads to lower output volatility. However, it also reduces the stabilizing effect of monetary policy which implies higher inflation volatility.

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File URL: https://www.oenb.at/dam/jcr:61d322bf-1a9f-4435-9ba4-cc87a6b7d2b3/wp117__tcm16-40481.pdf
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Paper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 117.

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Length: 32
Date of creation: 17 Mar 2006
Handle: RePEc:onb:oenbwp:117
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