On The Contribution of Interest Expense (Income) on Total Output

A decrease in interest rate in traditional view of monetary policy transmission is linked to a lower cost of borrowing which eventually results into a greater spending in investment and a bigger GDP. However, a decrease in interest rate is also linked to a decrease in interest income which, in turn,...

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Autor principal:	Nizam Ahmed Mehedi
Formato:	article
Lenguaje:	EN
Publicado:	De Gruyter 2021
Materias:	nominal interest expense nominal lending rate domestic credit gdp economic multiplier monetary policy transmission mechanism banking e43 e50 e52 g20 g21 Economics as a science HB71-74
Acceso en línea:	https://doaj.org/article/6e4badd9532e483280eb6483e6b93c24
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spelling	oai:doaj.org-article:6e4badd9532e483280eb6483e6b93c242021-12-05T14:11:00ZOn The Contribution of Interest Expense (Income) on Total Output2451-345810.1515/openec-2020-0112https://doaj.org/article/6e4badd9532e483280eb6483e6b93c242021-05-01T00:00:00Zhttps://doi.org/10.1515/openec-2020-0112https://doaj.org/toc/2451-3458A decrease in interest rate in traditional view of monetary policy transmission is linked to a lower cost of borrowing which eventually results into a greater spending in investment and a bigger GDP. However, a decrease in interest rate is also linked to a decrease in interest income which, in turn, affects the aggregate demand and total GDP. So far, no concerted effort has been made to investigate this positive inter-relation between interest income and GDP in the existing literature. Here in the first place we intuitively describe the inter-relation between interest income and output and then provide a micro-foundation of our intuitive reasoning in the context of a small endowment economy with finitely-lived identical households. Then we try to uncover the impact of nominal interest income on the macroeconomy using multiplier theory for a panel of some 04 (four) OECD countries. We define and calculate the corresponding multiplier values algebraically and then we empirically measure them using impulse response analysis under structural panel VAR framework. Large, consistent and positive values of the cumulative multipliers indicate a stable positive relationship between nominal interest income and output. Moreover, variance decomposition of GDP shows that a significant portion of the variance in GDP is attributed to interest income under VAR/VECM framework. Finally, we have shown how and where our analysis fits into the existing body of knowledge.Nizam Ahmed MehediDe Gruyterarticlenominal interest expensenominal lending ratedomestic creditgdpeconomic multipliermonetary policy transmission mechanismbankinge43e50e52g20g21Economics as a scienceHB71-74ENOpen Economics, Vol 4, Iss 1, Pp 31-56 (2021)
institution	DOAJ
collection	DOAJ
language	EN
topic	nominal interest expense nominal lending rate domestic credit gdp economic multiplier monetary policy transmission mechanism banking e43 e50 e52 g20 g21 Economics as a science HB71-74
spellingShingle	nominal interest expense nominal lending rate domestic credit gdp economic multiplier monetary policy transmission mechanism banking e43 e50 e52 g20 g21 Economics as a science HB71-74 Nizam Ahmed Mehedi On The Contribution of Interest Expense (Income) on Total Output
description	A decrease in interest rate in traditional view of monetary policy transmission is linked to a lower cost of borrowing which eventually results into a greater spending in investment and a bigger GDP. However, a decrease in interest rate is also linked to a decrease in interest income which, in turn, affects the aggregate demand and total GDP. So far, no concerted effort has been made to investigate this positive inter-relation between interest income and GDP in the existing literature. Here in the first place we intuitively describe the inter-relation between interest income and output and then provide a micro-foundation of our intuitive reasoning in the context of a small endowment economy with finitely-lived identical households. Then we try to uncover the impact of nominal interest income on the macroeconomy using multiplier theory for a panel of some 04 (four) OECD countries. We define and calculate the corresponding multiplier values algebraically and then we empirically measure them using impulse response analysis under structural panel VAR framework. Large, consistent and positive values of the cumulative multipliers indicate a stable positive relationship between nominal interest income and output. Moreover, variance decomposition of GDP shows that a significant portion of the variance in GDP is attributed to interest income under VAR/VECM framework. Finally, we have shown how and where our analysis fits into the existing body of knowledge.
format	article
author	Nizam Ahmed Mehedi
author_facet	Nizam Ahmed Mehedi
author_sort	Nizam Ahmed Mehedi
title	On The Contribution of Interest Expense (Income) on Total Output
title_short	On The Contribution of Interest Expense (Income) on Total Output
title_full	On The Contribution of Interest Expense (Income) on Total Output
title_fullStr	On The Contribution of Interest Expense (Income) on Total Output
title_full_unstemmed	On The Contribution of Interest Expense (Income) on Total Output
title_sort	on the contribution of interest expense (income) on total output
publisher	De Gruyter
publishDate	2021
url	https://doaj.org/article/6e4badd9532e483280eb6483e6b93c24
work_keys_str_mv	AT nizamahmedmehedi onthecontributionofinterestexpenseincomeontotaloutput
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On The Contribution of Interest Expense (Income) on Total Output

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