Credit Horizons

59 Pages Posted: 12 Feb 2021 Last revised: 22 Apr 2021

See all articles by Nobuhiro Kiyotaki

Nobuhiro Kiyotaki

Princeton University - Department of Economics

John Moore

University of Edinburgh - Economics; London School of Economics

Shengxing Zhang

Peking University HSBC Business School; London School of Economics (LSE) - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: April 21, 2021

Abstract

Entrepreneurs appear to borrow largely against their near-term revenues, even when their investment has a longer horizon. In this paper, we develop a model of credit horizons. A question of particular concern to us is whether persistently low interest rates can stifle economic activity. With this in mind, our model is of a small open economy where the world interest rate is taken to be exogenous. We show that a permanent fall in the interest rate can reduce aggregate investment and growth, and even lead to a drop in the welfare of everyone in the domestic economy. We use our framework to examine how credit horizons interact with plant dynamics and the evolution of productivity. Finally, we speculate that the measurement of total investment may camouflage the true level of productive investment in plant and human capital, and give too rosy a picture of property-fueled booms sparked by low interest rates.

Keywords: credit horizon, low interest rate, productivity, growth

JEL Classification: E44

Suggested Citation

Kiyotaki, Nobuhiro and Moore, John Hardman and Zhang, Shengxing, Credit Horizons (April 21, 2021). Available at SSRN: https://ssrn.com/abstract=3734844 or http://dx.doi.org/10.2139/ssrn.3734844

Nobuhiro Kiyotaki

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

John Hardman Moore

University of Edinburgh - Economics ( email )

50 George Square
Edinburgh, EH8 9JY, Scotland
United Kingdom

London School of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom
44-171-955-7550 (Phone)
44-171-831-1840 (Fax)

Shengxing Zhang (Contact Author)

Peking University HSBC Business School ( email )

London School of Economics (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

HOME PAGE: http://https://sites.google.com/site/oo7zsx/

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