Falling interest rates and credit reallocation: Lessons from general equilibrium
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- dc.contributor.author Asriyan, Vladimir
- dc.contributor.author Laeven, Luc
- dc.contributor.author Martin, Alberto
- dc.contributor.author Van der Ghote, Alejandro
- dc.contributor.author Vanasco, Victoria
- dc.contributor.other Universitat Pompeu Fabra. Departament d'Economia i Empresa
- dc.date.accessioned 2024-11-14T10:09:35Z
- dc.date.available 2024-11-14T10:09:35Z
- dc.date.issued 2021-05-01
- dc.date.modified 2024-11-14T10:08:06Z
- dc.description.abstract We show that in a canonical model with heterogeneous entrepreneurs, financial frictions, and an imperfectly elastic supply of capital, a fall in the interest rate has an ambiguous effect on aggregate economic activity. In partial equilibrium, a lower interest rate raises aggregate investment both by relaxing financial constraints and by prompting relatively less productive entrepreneurs to invest. In general equilibrium, however, this higher demand for capital raises its price and crowds out investment by more productive entrepreneurs. When this general-equilibrium induced reallocation is strong enough, a fall in the interest rate reduces aggregate output. We show that this reallocation effect is of the same order of magnitude as the balance-sheet channel, and that the interaction of both gives rise to boom-bust dynamics in response to a fall in the interest rate. Our novel mechanism contributes to the debate on whether and how low-interest environments may foster the proliferation of socially unproductive activities.
- dc.format.mimetype application/pdf*
- dc.identifier https://econ-papers.upf.edu/ca/paper.php?id=1784
- dc.identifier.citation
- dc.identifier.uri http://hdl.handle.net/10230/68557
- dc.language.iso eng
- dc.relation.ispartofseries Economics and Business Working Papers Series; 1784
- dc.rights L'accés als continguts d'aquest document queda condicionat a l'acceptació de les condicions d'ús establertes per la següent llicència Creative Commons
- dc.rights.accessRights info:eu-repo/semantics/openAccess
- dc.rights.uri http://creativecommons.org/licenses/by-nc-nd/3.0/es/
- dc.subject.keyword low interest rates
- dc.subject.keyword financial frictions
- dc.subject.keyword firm heterogeneity
- dc.subject.keyword misallocation
- dc.subject.keyword credit
- dc.subject.keyword asset prices
- dc.subject.keyword monetary policy
- dc.subject.keyword Macroeconomics and International Economics
- dc.title Falling interest rates and credit reallocation: Lessons from general equilibrium
- dc.title.alternative
- dc.type info:eu-repo/semantics/workingPaper