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Journal Articles European Economic Review Year : 2022

The inverted leading indicator property and redistribution effect of the interest rate

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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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Origin : Publication funded by an institution

Dates and versions

hal-03778018 , version 1 (15-09-2022)

Licence

Attribution - NonCommercial - NoDerivatives - CC BY 4.0

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Patrick Pintus, Yi Wen, Xiaochuan Xing. The inverted leading indicator property and redistribution effect of the interest rate. European Economic Review, 2022, 148, pp.104219. ⟨10.1016/j.euroecorev.2022.104219⟩. ⟨hal-03778018⟩
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