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The Financial Resource Curse Revisited: The Supply-Side Effect of Low Interest Rates

Author

Listed:
  • Simon Hildebrandt

    (University of Kassel)

  • Jochen Michaelis

    (University of Kassel)

Abstract

Benigno and Fornaro (2014) show that an episode of low interest rates may harm an economy. Low interest rates trigger a consumption boom, labor shifts away from the tradable sector, learning spillovers from foreign technology decline and so do domestic total factor productivity, consumption and welfare. In this paper, we show that their conclusion of a financial resource curse does not hold in a world with capital as production factor. Low interest rates now trigger an investment boom, there is no shift of labor between sectors, total factor productivity remains unaffected. Our model confirms “textbook wisdom†, i.e., an episode of low interest rates enhances welfare in a small open economy.

Suggested Citation

  • Simon Hildebrandt & Jochen Michaelis, 2022. "The Financial Resource Curse Revisited: The Supply-Side Effect of Low Interest Rates," MAGKS Papers on Economics 202222, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    • Handle: RePEc:mar:magkse:202222
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    capital accumulation; endogenous growth; macroeconomic integration;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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