Smoothed interest rate setting by central banks and staggered loan contracts

Research output: Contribution to journalArticle

3 Citations (Scopus)

Abstract

I investigate a new source of economic stickiness: namely, staggered loan interest rate contracts under monopolistic competition. This study 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, although a response to a productivity, cost-push or monetary policy shock is not much affected. I 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.

Original languageEnglish
Pages (from-to)162-183
Number of pages22
JournalEconomic Journal
Volume125
Issue number582
DOIs
Publication statusPublished - 2015 Feb 1

    Fingerprint

ASJC Scopus subject areas

  • Economics and Econometrics

Cite this