The Economic Impact of the Deposit Interest Rate Adjustment Speed

Patrick Gruning
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Patrick Gruning: Latvijas Banka

No 2025/05, Working Papers from 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.

Keywords: Monetary policy; Financial intermediaries; Deposit interest rates; New Keynesian DSGE model; Excess bank interest income tax (search for similar items in EconPapers)
JEL-codes: E31 E32 E44 E52 H25 (search for similar items in EconPapers)
Date: 2025-08-18
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:ltv:wpaper:202505

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