A DEPOSIT INTEREST CEILING AND THE STABILITY OF MACROECONOMY

Abstract

This paper studies the relationship between the abolishment of a deposit interest ceiling and the stability of macroeconomy, using a simple stochastic macroeconomic model. The derived conclusions are as follows; First, the abolishment of a deposit rate ceiling will improve the effectiveness of the economic policy when the economic fluctuation is mainly attributed to the random shock of high-powered money market. By contrast, if the shock of either loan or goods market is dominant, economic policy will be less effective. Second, the probability of lenders' bankruptcy will decrease when monetary shocks (i. e. H. P. M. and loan) are dominant.