Macroeconomics Seminar Series - Joseph Kachovec (RBA)

Title: Asymmetric interest rate smoothing and financial stability

Abstract: Central banks tend to lower policy rates at a faster pace than they raise them. Using a panel dataset of policy rates from 38 countries, this paper shows that during rate-cut cycles, central banks reach terminal rates more quickly than during rate-hike cycles. This asymmetry persists after controlling for inflation and output gaps in Taylor-type rules, suggesting that it may reflect factors beyond policymakers' responses to real-side economic fluctuations. We find that the asymmetry is more pronounced in countries with higher financial stability risks, as measured by bank capital ratios, net interest margins, and credit-to-GDP ratios. Taken together, these results highlight the importance of macro-financial linkages in central bank decision-making and an implicit interaction between monetary policy and financial stability mandates