skip to content

Faculty of Economics

Journal Cover

Isohatala, J., Kusmartsev, F., Milne, A. and Robertson, D.

Leverage constraints and real interest rates

Manchester School

Vol. 83(S2) pp. 83-109 (2015)

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.

Author links: Donald Robertson  

Publisher's Link:

Papers and Publications

Recent Publications

Bhattacharya, D., Dupas, P. and Kanaya, S. Demand and Welfare Analysis in Discrete Choice Models with Social Interactions Review of Economic Studies, accepted [2023]

Porzio, T., Rossi, F. and Santangelo, G. The Human Side of Structural Transformation American Economic Review [2022]

Freund, L. B., Lee, H. and Rendahl, P. The Risk-Premium Channel of Uncertainty: Implications for Unemployment and Inflation Review of Economic Dynamics, forthcoming [2023]

Aidt, T. S. Review of Forging the Franchise: The Political Origins of the Women's Vote Journal of Economic Literature [2022]