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Same old song: On the macroeconomic and distributional effects of leaving a Low Interest Rate Environment

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  • Botta, Alberto
  • Caverzasi, Eugenio
  • Russo, Alberto
Abstract
In this paper, we present a hybrid Agent-Based Stock-Flow-Consistent (AB-SFC) model about the macroeconomic and distributional implications of central bank’s decision to leave a “Low(-for-long) Interest Rate Environment” (LIRE). Our goal is to study the non-linear effects of monetary tightening when implemented under LIRE than in an alternative “Higher Interest Rate” setting (HIRE). This way, we shed light over the interaction between monetary policy, inequality, and macro-financial fragility in a financialized economy characterized by the presence of securitization and the production of complex financial products, i.e., Asset-Backed Securities (ABSs). We obtain three main findings. First, consistent with existing empirical literature, LIRE may be sources of vulnerabilities in the financial industry (i.e., lower banks’ profitability and capital adequacy ratio). However, it may reduce systemic macro-financial risk by stimulating faster growth, lower unemployment and inequality records alongside with lower public and private indebtedness and lower-scale securitization. Second, central bank’s decision to raise interest rates improves financial sector’s performance indicators at the costs of harsh real-side consequences, i.e., permanently higher unemployment and inequality, when implemented under LIRE. Third, financialization structurally changes the functioning of the economy by feeding the creation of a debt-led economy in which monetary policy becomes less effective in its attempt of controlling inflation. Central bank’s reaction in the form of a permanently tighter monetary policy stance eventually prompts a more unequal and unstable rentier-friendly economy.

Suggested Citation

  • Botta, Alberto & Caverzasi, Eugenio & Russo, Alberto, 2024. "Same old song: On the macroeconomic and distributional effects of leaving a Low Interest Rate Environment," Structural Change and Economic Dynamics, Elsevier, vol. 69(C), pages 552-570.
    • Handle: RePEc:eee:streco:v:69:y:2024:i:c:p:552-570
    DOI: 10.1016/j.strueco.2024.03.009
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    More about this item

    Keywords

    Low interest rate environment; Contractionary monetary policy; Securitization;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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