Interest Rates and Selection Along the Business Cycle

54 Pages Posted: 14 Apr 2020 Last revised: 28 Oct 2020

See all articles by Anastasios Dosis

Anastasios Dosis

ESSEC Business School; University of Cergy-Pontoise - THEMA

Date Written: April 10, 2020

Abstract

This paper studies the effect of interest rates on market selection. Consistent with the evidence, I demonstrate that busts exhibit adverse selection, whereas booms ac- companied by ultra-low rates exhibit advantageous selection. Interestingly, booms accompanied by intermediate interest rates simultaneously exhibit adverse and ad- vantageous selection. Changes in interest rates affect selection and, hence, the quan- tity and quality of loans. When interest rates are endogenous, multiple equilibria arise, although higher interest rate equilibria imply more and better loans. Adverse selection attenuates the stimulatory effects of monetary policy, and zero interest rates can lead banks to hoard cash. Several extensions and robustness checks are applied.

Keywords: Interest Rates, Banking, Lending, Selection, Monetary Policy

JEL Classification: D82, E30, E44, E58, G01, G21

Suggested Citation

Dosis, Anastasios, Interest Rates and Selection Along the Business Cycle (April 10, 2020). Available at SSRN: https://ssrn.com/abstract=3572799 or http://dx.doi.org/10.2139/ssrn.3572799

Anastasios Dosis (Contact Author)

ESSEC Business School

3 Avenue Bernard Hirsch
B.P 50105
Cergy - Pontoise Cedex, NA 95021
France

University of Cergy-Pontoise - THEMA ( email )

33 boulevard du port
F-95011 Cergy-Pontoise Cedex, 95011
France

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