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Business loan characteristics and inflation shocks transmission in the euro area

Author

Listed:
  • Valentina Michelangeli

    (Bank of Italy)

  • Fabio Massimo Piersanti

    (Bank of Italy)

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.

Suggested Citation

  • Valentina Michelangeli & Fabio Massimo Piersanti, 2025. "Business loan characteristics and inflation shocks transmission in the euro area," Temi di discussione (Economic working papers) 1477, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1477_25
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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2025/2025-1477/en_tema_1477.pdf
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    More about this item

    Keywords

    banks; DSGE model; long-term loans; rate type; inflation; monetary policy; fiscal policy;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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