In particular, the bargaining power of banks could explain why the lending rates exhibit downward rigidity to a monetary policy rate cut and upward flexibility to a monetary policy rate hike.
But the rigidity of its monetary system, designed to protect against inflation, precludes any of the actions that countries normally take to fight deflation, such as cutting interest rates or letting the currency depreciate.
Yet that achievement is under threat because the European elite, in its arrogance, locked the Continent into a monetary system that recreated the rigidities of the gold standard, and — like the gold standard in the 1930s — has turned into a deadly trap.
First, intentions can be respectable without being clearheaded, and the foundations of the current austerity policy, combined with the rigidities of Europe's monetary union (in the absence of fiscal union), have hardly been a model of cogency and sagacity.
There are many reasons behind the crisis, from corruption and collective irresponsibility in Greece to European institutional rigidities and the flawed concept of a monetary union without a fiscal union.
Similarly, the lending rates could exhibit downward rigidity in reaction to a reduction in the monetary policy rate as lower lending rates imply lower profits for banks.
Without monetary policy as an option and with reduced fiscal discretion, the rigidities in European labor markets have consequences that are much more serious than they would otherwise be.
The rigidity of the currency board, which rules out both devaluation and independent monetary policy, has meant that Argentina has had to adjust to a tougher world through deflation.
That framework, which combines the rigor and internal consistency of dynamic general equilibrium models with such typically Keynesian assumptions as monopolistic competition and nominal rigidities, makes possible a meaningful, welfare-based analysis of the effects of monetary policy rules.
