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Title: Leverage constraints and real interest rates
Authors: Isohaetaelae, Jukka
Kusmartsev, F.V.
Milne, Alistair
Robertson, Donald
Keywords: Borrowing constraints
Debt management
Incomplete financial markets
International macroeconomics
Finance and macroeconomics
Leverage cycles
Macroeconomic propagation
Precautionary saving
Secular stagnation
Systemic risk
Issue Date: 2015
Publisher: © The University of Manchester and John Wiley & Sons Ltd
Citation: ISOHAETAELAE, J. ...et al., 2015. Leverage constraints and real interest rates. The Manchester School, 83(S2), pp. 83-109.
Abstract: This 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.
Description: This is the peer reviewed version of the following article: ISOHAETAELAE, J. ...et al., 2015. Leverage constraints and real interest rates. The Manchester School, 83(S2), pp. 83-109., which has been published in final form at http://dx.doi.org/10.1111/manc.12111. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving
Version: Accepted for publication
DOI: 10.1111/manc.12111
URI: https://dspace.lboro.ac.uk/2134/20546
Publisher Link: http://dx.doi.org/10.1111/manc.12111
ISSN: 1463-6786
Appears in Collections:Published Articles (Physics)
Published Articles (Business)

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