Smoothed Interest Rate Setting by Central Banks and Staggered Loan Contracts

Yuki Teranishi

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: We investigate a new source of economic stickiness: namely, staggered loan interest rate contracts under monopolistic competition. The paper 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 though a response to a productivity, cost-push or monetary policy shock is not much affected. We 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.

Keywords: Staggered loan interest rate; economic fluctuation; optimal monetary policy (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 G21 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2013-07
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Related works:
Journal Article: Smoothed Interest Rate Setting by Central Banks and Staggered Loan Contracts (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2013-45

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