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: Yale University [New Haven]

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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: State-Contingent Interest Rate; Endogenous Collateral Constraints; Redistribution Shocks; Multiple Equilibria (search for similar items in EconPapers)
Date: 2022-04-20
New Economics Papers: this item is included in nep-dge
Note: View the original document on HAL open archive server: https://amu.hal.science/hal-03669938v1
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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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