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The Inverted Leading Indicator Property and Redistribution Effect of the Interest Rate

Abstract : The interest rate at which US firms borrow funds has two features: (i) it moves in a countercyclical fashion and (ii) it is an inverted leading indicator of real economic activity: low interest rates today forecast future booms in GDP, consumption, investment, and employment. We show that a Kiyotaki-Moore model accounts for both properties when interest-rate movements are driven, in a significant way, by self-fulfilling belief shocks that redistribute income away from lenders and to borrowers during booms. The credit-based nature of such self-fulfilling equilibria is shown to be essential: the dynamic correlation between current loanable funds rate and future aggregate economic activity depends critically on the property that the interest rate is state-contingent. Bayesian estimation of our benchmark DSGE model on US data shows that the model driven by redistribution shocks results in a better fit to the data than both standard RBC models and Kiyotaki-Moore type models with unique equilibrium.
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https://hal-amu.archives-ouvertes.fr/hal-03669938
Contributor : Elisabeth Lhuillier Connect in order to contact the contributor
Submitted on : Tuesday, May 17, 2022 - 10:01:25 AM
Last modification on : Wednesday, May 18, 2022 - 3:40:19 AM

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  • HAL Id : hal-03669938, version 1

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Patrick Pintus, yi Wen, Xiaochuan Xing. The Inverted Leading Indicator Property and Redistribution Effect of the Interest Rate. 2022. ⟨hal-03669938⟩

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