Lumpy Investment, Business Cycles, and Stimulus Policy

2021 ◽  
Vol 111 (1) ◽  
pp. 364-396 ◽  
Author(s):  
Thomas Winberry
Keyword(s):  
Interest Rate ◽  
Business Cycles ◽  
Interest Rates ◽  
Real Interest Rate ◽  
Extensive Margin ◽  
Investment Behavior ◽  
The Real ◽  
Lumpy Investment ◽  
Aggregate Investment ◽  
Micro Level

I study the aggregate implications of micro-level lumpy investment in a model consistent with the empirical dynamics of the real interest rate. The elasticity of aggregate investment with respect to shocks is procyclical because more firms are likely to make an extensive margin investment in expansions than in recessions. Matching the dynamics of the real interest rate is key to generating this result because it disciplines the interest-elasticity of investment and avoids counterfactual behavior of the model that would otherwise eliminate most of the procyclical responsiveness. Therefore, data on interest rates place important discipline in aggregating micro-level investment behavior. (JEL D25, E13, E22, E23, E43, G31, H25)

scholarly journals POPULATION AGING AND THE REAL INTEREST RATE IN THE LAST AND NEXT 50 YEARS: A TALE TOLD BY AN OVERLAPPING GENERATIONS MODEL

2019 ◽  
Vol 24 (8) ◽  
pp. 2060-2103 ◽  
Author(s):  
Nao Sudo ◽  
Yasutaka Takizuka
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Real Interest Rate ◽  
Overlapping Generations ◽  
Population Aging ◽  
Developed Countries ◽  
Demographic Changes ◽  
Real Interest Rates ◽  
Overlapping Generations Model ◽  
The Real

Population aging, along with a secular decline in real interest rates, is an empirical regularity observed in developed countries over the last few decades. Under the premise that population aging will deepen in coming years, some studies predict that real interest rates will continue to be depressed further to a level below zero. In this paper, we address this issue and explore how changes in demographic structures have affected and will affect real interest rates, using an overlapping generations model calibrated to Japan’s economy. We find that the demographic changes over the last 50 years reduced the real interest rate. About 270 out of the 640 basis points decline in real interest rates during this period was due to declining labor inputs and higher saving, which themselves stemmed from the lower fertility rate and increased life expectancy. As for the next 50 years, we find that demographic changes alone will not substantially increase or decrease the real interest rate from the current level. These changes reflect the fact that the size of demographic changes in years ahead will be minimal, but that downward pressure arising from the past demographic changes will continue to bite. As Japan is not unique in terms of this broad picture of changes in demographic landscapes in the last and next 50 years, our results suggest that, sooner or later, a demography-induced decline in real interest rates may be contained in other developed countries as well.

scholarly journals Risk Matters: The Real Effects of Volatility Shocks

2011 ◽  
Vol 101 (6) ◽  
pp. 2530-2561 ◽  
Author(s):  
Jesús Fernández-Villaverde ◽  
Pablo Guerrón-Quintana ◽  
Juan F Rubio-Ramírez ◽  
Martin Uribe
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Open Economy ◽  
Emerging Economies ◽  
Real Interest Rate ◽  
Small Open Economy ◽  
Real Interest Rates ◽  
The Real ◽  
Interest Rate Volatility ◽  
Business Cycle Model

We show how changes in the volatility of the real interest rate at which small open emerging economies borrow have an important effect on variables like output, consumption, investment, and hours. We start by documenting the strong evidence of time-varying volatility in the real interest rates faced by four emerging economies: Argentina, Brazil, Ecuador, and Venezuela. We estimate a stochastic volatility process for real interest rates. Then, we feed this process in a standard small open economy business cycle model. We find that an increase in real interest rate volatility triggers a fall in output, consumption, investment, hours, and debt. (JEL E13, E20, E32, E43, F32, F43, 011)

BEHAVIOR OF INTEREST RATES IN A GENERAL EQUILIBRIUM MULTISECTOR MODEL WITH IRREVERSIBLE INVESTMENT

1997 ◽  
Vol 1 (1) ◽  
pp. 206-227 ◽  
Author(s):  
WILBUR JOHN COLEMAN II
Keyword(s):  
Time Series ◽  
Interest Rate ◽  
General Equilibrium ◽  
Interest Rates ◽  
Real Interest Rate ◽  
Irreversible Investment ◽  
The Real ◽  
Future Return ◽  
The Interest Rate ◽  
Multisector Model

The behavior of the real interest rate in a general equilibrium multisector model with irreversible investment is examined. It is shown that in such a model purely sectoral shocks can lead to substantial variation in the real interest rate and other aggregate time series. A source of variation in aggregate time series that is not found in one-sector models is thus examined, and the implications of this source of variation for the behavior of the interest rate are highlighted. Such a model seems to better capture the relationship among the real interest and output or investment than the standard one-sector stochastic growth model. It is also shown that, because of a desire to smooth consumption, with irreversible investment a rise in uncertainty concerning the future return to capital tends to lead to more current investment and a lower real interest rate.

scholarly journals An Examination of Uncovered Real Interest Rate Parity In 18 Distinct U.S. Manufacturing Industries

1970 ◽  
Vol 29 (1) ◽  
pp. 57-78
Author(s):  
Wan Shin Moh ◽  
Masha Rahnamamoghadam ◽  
Victor Valcarcel
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Real Interest Rate ◽  
Manufacturing Industries ◽  
Interest Rate Parity ◽  
Real Interest Rate Parity ◽  
Level Data ◽  
Inflation Rates ◽  
Micro Level ◽  
Rate Parity

In a departure from the standard literature, we consider micro-level data todraw inferences about the uncovered real interest rate parity in 18 distinct manufacturingindustries across 25 countries. The real interest rates are computed based ontrade weights at the industry level. We examine the time series properties of real interestdifferentials by employing a battery of unit root tests. Using industry-specificquarterly observations on deposit and inflation rates, we find robust and statisticallysignificant evidence in support of the uncovered real interest rate parity (UIP) inevery industry we consider across all 25 countries.

Dynamic lag structure of deposits and loans interest rates and business cycles formation

2017 ◽  
Vol 25 (2) ◽  
pp. 114-132
Author(s):  
Bijan Bidabad ◽  
Abul Hassan
Keyword(s):  
Interest Rate ◽  
Business Cycles ◽  
Interest Rates ◽  
Banking System ◽  
Real Economy ◽  
Short Term ◽  
Structural Dynamic ◽  
Content Type ◽  
The Real

Purpose This paper aims to study the structural dynamic behaviour of the depositors, banks and investors and the role of banks in the business cycles. The authors test the hypothesis: do banks’ behaviour make oscillations in the economy via interest rate? Design/methodology/approach The authors dichotomized banking activities into two markets: deposit and loan. The first market forms deposit interest rate, and the second market forms credit interest rate. The authors show that these two types of interest rates have non-synchronized structures, and that is why money sector fluctuation starts. As a result, the fluctuation is transferred to the real economy through saving and investment functions. Findings The empirical results show that in the USA, the banking system creates fluctuations in money and real economy, as well as through interest rates. Short-term interest rates had complex roots in their characteristic, while medium and long-term interest rates, though they were second-order difference equations, had real characteristic roots. However, short-term interest rates are the source of oscillation and form the business cycles. Research limitations/implications The authors tested the hypothesis for USA economy, while it needs to be tested for other economies as well. Practical implications The results show that though the source of fluctuations in the real economy comes from short-term interest rates, medium- and long-term interest rates dampen real economy fluctuations and also work as economic stabilisers. Originality/value Regarding the applied method, the topic is new.

scholarly journals CAN RBC MODELS EXPLAIN BUSINESS CYCLES IN KOREA?

2016 ◽  
Vol 21 (3) ◽  
pp. 599-623 ◽  
Author(s):  
Wooheon Rhee
Keyword(s):  
Interest Rate ◽  
Business Cycles ◽  
Emerging Economies ◽  
Real Interest Rate ◽  
Error Term ◽  
Strong Negative Correlation ◽  
The Real ◽  
Elasticity Of Intertemporal Substitution ◽  
Korean Economy ◽  
Rbc Models

I examine whether an RBC model can generate a higher volatility of consumption relative to output, a strong negative correlation between output and the trade balance, and a weak countercyclicality of the real interest rate, phenomena that have been observed in the business cycles of emerging economies, including Korea. From an RBC model with recursive utility, I show that it is not the degree of relative risk aversion, but the elasticity of intertemporal substitution (EIS), that governs the movements of the variables of the model in the log linearized environment. The Bayesian estimation results based on Korean data from the period 1987 to 2013 suggest that there are some elements of success in describing the Korean economy based on the simple RBC model both with the EIS larger than one and with an error term for the real interest rate equation. An EIS larger than one improves the performance of the simple RBC model mainly in the direction of raising the volatility of consumption relative to output. Simulation results show that the error term for the real interest rate process mostly reflects the endogenous channel of financial frictions where the domestic real interest rate depends negatively on the expected (transitory) productivity shock.

scholarly journals The Effects of Exchange Rate Volatility, Reserve Volatility and Real Interest Rates on Trade: Applications on Transition Economies

2013 ◽  
Author(s):  
Cevat Gerni ◽  
Selahattin Sarı ◽  
Dilek Özdemir ◽  
Ömer Selçuk Emsen
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Foreign Trade ◽  
Interest Rates ◽  
Transition Economies ◽  
Trade Balance ◽  
Real Interest Rate ◽  
Exchange Rate Volatility ◽  
Real Interest Rates ◽  
The Real

On the basis of volatility or sharp fluctuations in macroeconomic variables, especially in the 1970s, it can be said to play a role in deepening the financial capital deepening. Deepening on volatility forms the basis of not only domestic and but also international economic deviations. With the collapse of the Eastern Bloc, a lot of countries have attempted to liberalize. This situation has caused volatility on mainly rate of exchange then many macroeconomics variables. In this aspect, the multi-relationship between volatility in foreign trade balance and the real interest rate, exchange rate and reserves’ volatility are investigated empirically with the appropriate set of data on 11 transition economies for the period 1996-2011. In this study, the effects of the volatility of foreign trade (netxvol) on the exchange rate volatility (kurvol), reserve volatility (rezvol), and real interest rates subjected with using panel data analysis. Moreover to regression analysis, centred on Granger Causality Test the volatility of the foreign trade balance, import and export volatility, exchange rate volatility, volatility of reserves and try to determine the causal relationship between the real interest rate. The findings have light on that the volatility of trade balance was mostly affected to the volatility of the reserve. It may well be said that the volatility of the interest rate and the exchange rate at the independence of the trade predispose to speculative movements.

scholarly journals Financial mechanisms of ensuring the development of business under high interest rates

VUZF Review ◽  
2021 ◽  
Vol 6 (2) ◽  
pp. 16-23
Author(s):  
Vitaliy Shapran ◽  
Igor Britchenko
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Real Interest Rate ◽  
Stock Exchanges ◽  
The Real ◽  
High Interest ◽  
Financial Conditions ◽  
The Us ◽  
Definition Of ◽  
The Given

In the given article the problems of choice as for the types and forms of debt and share financing on the developing and “frontier markets” with high interest rates have been considered, the definition of what kind of interest rates can be viewed as high and under which circumstances nominal interest rate and in which ones – the real interest rate is important for business. Also, the classification of debt and sharing financing is given and the comparative analysis of such financing is made. Some close attention has been paid to the calculation of the real interest rate according to the inflation forecast. Recommendations concerning attracting of relatively cheap trade financing including international financial and credit organizations, development of operation factoring, financing from captive financial institutions of the exporters of the materials and equipment from the EU and the US have been grounded. The opportunity of relatively free of charge share financing through the mechanism of placing shares IPO/SPO is emphasized, exemplified by the results of placing shares on stock exchanges and their alternative platforms of issuing banks with businesses in Ukraine in 2005 – 2013. As a result, the conclusion concerning the necessity of thorough analysis of financial conditions on the developing and frontier markets before gaining such financing has been made. High interest rates within the average indicators even on the basis of prime rates do not necessarily mean absence of attractive conditions of financing.

scholarly journals THE EFFECT OF MONETARY POLICY ON UNEMPLOYMENT RATE IN INDONESIA

2021 ◽  
Vol 6 (1) ◽  
pp. 1
Author(s):  
Hafiansyah Mahadika ◽  
Wisnu Wibowo
Keyword(s):  
Economic Growth ◽  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Unemployment Rate ◽  
Real Interest Rate ◽  
Real Exchange Rates ◽  
Series Data ◽  
The Real ◽  
The Impact

This study aims to determine the influence of monetary policy on the unemployment rate in Indonesia. Unemployment is one of the fundamental problems in the economy. The unemployment problem can be overcome by monetary policy. This study used time series data with the period 1975-2016 using real money demand, economic growth, real interest rates, and real exchange rates as independent variables, and the unemployment rate as the dependent variable. The data used in this study is secondary data obtained from the World Bank. The method used is ARDL (Autoregressive Distributed Lag) which can change a static economic theory to be dynamic by taking into account the role of time explicitly. The results show that in the long run the probability value of the economic growth variable is below the 5% significance level which indicates that economic growth had a negative and significant effect on the unemployment rate. In the short run, the real interest rate, the real interest rate at lag 1, economic growth at lag 1 and lag 3, and the real exchange rate at lag 1 had a negative and significant effect on the unemployment rate. This indicates that the impact of monetary policy on the unemployment rate is temporary.Keywords: Unemployment Rate, Monetary Policy, ARDL.JEL : E24, E52, E61.

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