Asriyan, VladimirLaeven, LucMartin, Alberto, 1974-Van der Ghote, AlejandroVanasco, Victoria2025-02-042024Vladimir A, Laeven L, Martin A, Van der Ghote A, Vanasco V. Falling interest rates and credit reallocation: lessons from general equilibrium. Rev Econ Stud. 2024 Jun 25. DOI: 10.1093/restud/rdae0650034-6527http://hdl.handle.net/10230/69480Data de publicació electrònics: 25-06-2024Supplementary materials files: online appendix; replication data.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.application/pdfeng© Oxford University Press. This is a pre-copyedited, author-produced version of an article accepted for publication in The Review of Economic Studies following peer review. The version of record Vladimir A, Laeven L, Martin A, Van der Ghote A, Vanasco V. Falling interest rates and credit reallocation: lessons from general equilibrium. Rev Econ Stud. 2024 Jun 25. DOI: 10.1093/restud/rdae065 is available online at: https://academic.oup.com/restud/advance-article-abstract/doi/10.1093/restud/rdae065/7698437 and https://doi.org/10.1093/restud/rdae065.info:eu-repo/semantics/articlehttp://dx.doi.org/10.1093/restud/rdae065Interest ratesFinancial frictionsFirm heterogeneityAllocationAsset pricesMonetary policyinfo:eu-repo/semantics/embargoedAccess