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

Patrick Pintus, Yi Wen and X. Xing

Working papers from Banque de France

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 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.

Keywords: Endogenous Collateral Constraints; State-Contingent Loan Repayment; Redistribution Shocks; Multiple Equilibria (search for similar items in EconPapers)
JEL-codes: O11 O33 O43 O47 O57 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2016
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Journal Article: The inverted leading indicator property and redistribution effect of the interest rate (2022)
Working Paper: The Inverted Leading Indicator Property and Redistribution Effect of the Interest Rate (2022)
Working Paper: The inverted leading indicator property and redistribution effect of the interest rate (2022)
Working Paper: The Inverted Leading Indicator Property and Redistribution Effect of the Interest Rate (2022)
Working Paper: The Inverted Leading Indicator Property and Redistribution Effect of the Interest Rate (2016)
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