This paper investigates how business loan characteristics, i.e. interest rate type and maturity, affect the transmission of inflation shocks across euro-area countries by means of a DSGE model. We use a local projection model to validate our findings. Finally, we use the theoretical model to propose the most appropriate policy tool to uniform the shock transmission across euro-area countries with different business loan characteristics.
We find that longer maturity loans stabilize business cycles, while adjustable-rate loans exacerbate recessions. Finally, the model shows that, in the context of inflation shocks, countries with higher shares of adjustable-rate loans would benefit from less reactive, but still restrictive, monetary policies and less procyclical fiscal policies.
