Funding Horizons, Interest Rates, and Growth

Speaker：Zhang Shengxing (Assistant Professor, London School of Economics and Political Science)

Host：Xiao Kezhou, Assistant Professor, Lingnan College

Time and Date：14:30, Apr.28, 2023

Venue: Wang Daohan Conference Room(101), Lingnan Hall

Language: English + Chinese

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-fuelled booms sparked by low interest rates.

Profile of the speaker:

Shengxing Zhang is an Assistant Professor of Economics at the London School of Economics. He received his PhD from New York University. He works on market microstructure, monetary policy, liquidity of the financial market, and macro implications of finance frictions.