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, 1974-
• dc.contributor.author Van der Ghote, Alejandro
• dc.contributor.author Vanasco, Victoria
• dc.date.accessioned 2025-02-04T08:35:23Z
• dc.date.issued 2025
• dc.description Supplementary materials files: online appendix; replication data.
• 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 reallocation is strong enough, a fall in the interest rate reduces aggregate output. A numerical exploration of the model suggests that this reallocation effect is quantitatively significant and—in response to persistent changes in the interest rate—stronger than the traditional balance-sheet channel. We provide evidence of the reallocation effect using U.S. firm-level data.
• dc.description.sponsorship Asriyan, Martin and Vanasco acknowledge financial support from the Spanish Ministry of Economy and Competitiveness, through the Severo Ochoa Programme for Centres of Excellence in R&D (CEX2019-000915-S), and from the Generalitat de Catalunya, through CERCA and SGR Programme (2021SGR1599). Asriyan acknowledges financial support from the Spanish State Research Agency and the European Social Fund (RYC2019-027607-I/AEI/10.13039/501100011033) and together with Vanasco from the Spanish State Research Agency (PID2019-110726GA-I00/AEI/10.13039/501100011033). Martin acknowledges financial support from the European Union (ERC, MACROTRENDS&FINANCE, 101052964).
• dc.format.mimetype application/pdf
• dc.identifier.citation Asriyan V, Laeven L, Martin A, Van der Ghote A, Vanasco V. Falling interest rates and credit reallocation: lessons from general equilibrium. Rev Econ Stud. 2025 Jul;92(4):2197–227. DOI: 10.1093/restud/rdae065
• dc.identifier.doi http://dx.doi.org/10.1093/restud/rdae065
• dc.identifier.issn 0034-6527
• dc.identifier.uri http://hdl.handle.net/10230/69480
• dc.language.iso eng
• dc.publisher Oxford University Press
• dc.relation.ispartof The Review of Economic Studies. 2025 Jul;92(4):2197-227
• dc.relation.isreferencedby http://dx.doi.org/10.5281/zenodo.10966336
• dc.relation.projectID info:eu-repo/grantAgreement/EC/HE/101052964
• dc.relation.projectID info:eu-repo/grantAgreement/ES/2PE/CEX2019-000915-S
• dc.relation.projectID info:eu-repo/grantAgreement/ES/2PE/PID2019-110726GA-I00
• dc.rights ©The Author(s) 2024. Published by Oxford University Press on behalf of The Review of Economic Studies Limited. This is an Open Access article distributed under the terms of the Creative Commons Attribution License (https://creativecommons.org/licenses/by/4.0/), which permits unrestricted reuse, distribution, and reproduction in any medium, provided the original work is properly cited.
• dc.rights.accessRights info:eu-repo/semantics/openAccess
• dc.rights.uri http://creativecommons.org/licenses/by/4.0/
• dc.subject.keyword Interest rates
• dc.subject.keyword Financial frictions
• dc.subject.keyword Firm heterogeneity
• dc.subject.keyword Allocation
• dc.subject.keyword Asset prices
• dc.subject.keyword Monetary policy
• dc.title Falling interest rates and credit reallocation: lessons from general equilibrium
• dc.type info:eu-repo/semantics/article
• dc.type.version info:eu-repo/semantics/publishedVersion