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

Patrick Pintus, Yi Wen and Xiaochuan Xing
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Xiaochuan Xing: Balyasny Asset Management L.P

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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.

Keywords: Endogenous collateral constraints; State-contingent interest rate; Redistribution shocks; Multiple equilibria (search for similar items in EconPapers)
Date: 2022-09
New Economics Papers: this item is included in nep-ban and nep-dge
Note: View the original document on HAL open archive server: https://amu.hal.science/hal-03778018v1
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Published in European Economic Review, 2022, 148, pp.104219. ⟨10.1016/j.euroecorev.2022.104219⟩

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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 (2016)
Working Paper: The Inverted Leading Indicator Property and Redistribution Effect of the Interest Rate (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03778018

DOI: 10.1016/j.euroecorev.2022.104219

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