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Why is the Interest Rate an Inverted Leading Indicator of Macroeconomic Activity in the United States?

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  • Patrick A. Pintus

    (Centre de recherche de la Banque de France - Banque de France, GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)

Abstract

The real interest rate at which US firms borrow funds to finance their investment and other expenses has two striking features. It is low when GDP is high (and vice versa) and it is an inverted leading indicator of real economic activity. Low interest rates today forecast future booms in GDP, consumption, investment, and employment. This Rue de la Banque shows that inherent to such correlations is a redistribution channel through which resources typically flow from lending entities to borrowing firms during expansions. Such a redistribution channel is driven by expectations about future levels of the borrowing cost, which accounts for a large share of the volatility of output, investment and other macroeconomic variables during business cycles.

Suggested Citation

  • Patrick A. Pintus, 2017. "Why is the Interest Rate an Inverted Leading Indicator of Macroeconomic Activity in the United States?," Post-Print hal-01634185, HAL.
    • Handle: RePEc:hal:journl:hal-01634185
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    References listed on IDEAS

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    1. Thomas Chaney & David Sraer & David Thesmar, 2012. "The Collateral Channel: How Real Estate Shocks Affect Corporate Investment," American Economic Review, American Economic Association, vol. 102(6), pages 2381-2409, October.
    2. João Gomes & Urban Jermann & Lukas Schmid, 2016. "Sticky Leverage," American Economic Review, American Economic Association, vol. 106(12), pages 3800-3828, December.
    3. Pintus, Patrick A. & Wen, Yi & Xing, Xiaochuan, 2022. "The inverted leading indicator property and redistribution effect of the interest rate," European Economic Review, Elsevier, vol. 148(C).
    4. Zheng Liu & Pengfei Wang & Tao Zha, 2013. "Land‐Price Dynamics and Macroeconomic Fluctuations," Econometrica, Econometric Society, vol. 81(3), pages 1147-1184, May.
    5. King, Robert G & Watson, Mark W, 1996. "Money, Prices, Interest Rates and the Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 35-53, February.
    6. repec:hal:spmain:info:hdl:2441/75koqefued8i7pihbrl9u84p4u is not listed on IDEAS
    7. Vickery, James, 2008. "How and why do small firms manage interest rate risk," Journal of Financial Economics, Elsevier, vol. 87(2), pages 446-470, February.
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