Credit crunches could bring deflation, forcing central banks to lower rates.
Nominal interest rates that can't keep up with real rates can lead to an upside-down effect on inflation. When credit crunches hit hard, deflation can occur, prompting central banks to lower interest rates to boost inflation. This study reveals that rigid interest rates play a big role in shaping inflation trends. Loan prices are also affected by past loan deals, adding to the rigidity in the loan market.