Business loan characteristics and inflation shocks transmission in the euro area

Valentina Michelangeli () and Fabio Massimo Piersanti
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Valentina Michelangeli: Bank of Italy

No 1477, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This paper investigates how business loan characteristics, such as rate type and maturity, affect the transmission of inflation shocks. We exploit a DSGE model with a banking sector to show that longer maturity loans stabilize business cycles by dampening inflation induced fluctuations, while adjustable-rate loans exacerbate recessions. A local projection model using inflation surprises in euro area countries supports these theoretical results. We find that countries with higher shares of adjustable-rate loans would benefit from less reactive monetary and less procyclical fiscal policies, highlighting the potential effectiveness of fiscal policy fine-tuning in closing the welfare gap between fixed and adjustable-rate economies.

Keywords: banks; DSGE model; long-term loans; rate type; inflation; monetary policy; fiscal policy (search for similar items in EconPapers)
JEL-codes: E32 E43 E44 E52 E62 G21 (search for similar items in EconPapers)
Date: 2025-02
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