Downward interest rate rigidity

Empirical evidence suggests that bank lending rates are downward rigid: banks tend to adjust their more slowly and less completely short-term market decreases than increases. We investigate the macroeconomic consequences of this interest rate rigidity by introducing asymmetric adjustment costs in a macrofinance dynamic stochastic general equilibrium model. Calibrating model euro area economy, we find difference initial response GDP positive negative economic shocks similar amplitude can reach up 25%. This means central would have cut its policy much obtain symmetric medium-run impact on GDP. also show is stronger when stuck at effective lower bound, further disrupting monetary transmission. These findings imply neglecting asymmetry retail adjustments may yield misguided decisions.