Leverage Constraints and Real Interest Rates
Accepted version
Peer-reviewed
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Abstract
jats:pThis paper investigates the macroeconomic dynamics of consumption and real interest rates when there are constraints on debt finance, used both for insurance against income shocks and transferability of resources over time. We amend a standard continuous‐time deterministic model, with patient and impatient household sectors, introducing sector level income shocks. Shocks that push the impatient sector towards its leverage limit increase precautionary saving and result in a substantial but transient decline of the real interest rate relative to the deterministic benchmark. We discuss the resulting dynamics of consumption, leverage and interest rates, and implications for macroeconomic modelling and policy.</jats:p>
Description
Keywords
38 Economics, 3801 Applied Economics, 3802 Econometrics, 3803 Economic Theory
Journal Title
Manchester School
Conference Name
Journal ISSN
1463-6786
1467-9957
1467-9957
Volume Title
83
Publisher
Wiley
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All rights reserved