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Bond Rate, Loan Rate and Tobin's q in a Temporary Equilibrium Model of the Financial Sector
Author(s) -
Franke Reiner,
Semmler Willi
Publication year - 1999
Publication title -
metroeconomica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.256
H-Index - 29
eISSN - 1467-999X
pISSN - 0026-1386
DOI - 10.1111/1467-999x.00077
Subject(s) - economics , bond , stylized fact , interest rate , general equilibrium theory , loan , bond market , monetary economics , comparative statics , financial market , equity (law) , financial economics , macroeconomics , finance , political science , law
The paper sets up a portfolio model of the financial sector with markets for equity, government bonds, money and debt. The comparative statics of the temporary equilibrium are studied analytically and numerically. Subsequent simulations explore the reactions of financial markets in response to stylized oscillations of some of the exogenous variables. These include economic activity, income distribution, inflation, investors' sentiment, and banks' perceived bankruptcy risk of firms. Special emphasis is put on the resulting cyclical pattern of Tobin's q and the interest spread between loan rate and bond rate.