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Events of Department of Economics

November 5, 2020 at 12:30 - 13:45

Seminar (Joint with the BAFFI CAREFIN)


Interest Rates, Asset Prices, and the Allocation of Credit

Victoria Vanasco (CREI) Abstract

Abstract: There is a growing concern that low interest rates may foster unproductive activities thereby adversely affecting economic activity. In this paper, we develop a stylized framework to analyze the effects of interest rate on the allocation of credit, on asset prices and on economic activity. Our framework has two key ingredients: heterogeneous productivity across firms and financial constraints. We show that a decline in interest rates has a non-monotonic effect on aggregate TFP and may even lead to a contraction in economic activity. The reason is that, in addition to their traditional stimulative effect on economic activity, low interest rates foster entry by relatively unproductive firms, which bid up asset/factor prices and crowd-out productive activities. Our findings have important implications for the design of optimal monetary and macroprudential policies.

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