The Economic Impact of the Deposit Interest Rate Adjustment Speed

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 ad- justment 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 macroe- conomic 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

JEL codes: E31, E32, E44, E52, H25