 Credit and the Natural Rate of InterestFiorella De Fiore and Oreste Tristani Journal of Money, Credit and Banking, 2011, vol. 43, issue 2‐3, 407-440 Abstract: We analyze the properties of the natural rate of interest in an economy with asymmetric information between borrowers and lenders, and nominal debt contracts. In our model, monetary policy has real effects in the flexible‐price equilibrium because it affects the cost of external finance. As a consequence, under the standard definition, the natural rate of interest is not a useful policy indicator because it is itself affected by monetary policy. We propose a generalized definition and demonstrate that the resulting natural rate (i) is not policy dependent and (ii) delivers price stability if used as the intercept of a monetary policy rule. From a qualitative perspective, the dynamics of the natural rate in response to shocks can be very different in economies with or without financial frictions. Quantitatively, the policy implications of these differences tend to be minor for real shocks, but sizable for financial shocks of the magnitude observed during the financial crisis of 2007–09. Date: 2011 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:43:y:2011:i:2-3:p:407-440 Access Statistics for this article Journal of Money, Credit and Banking is currently edited by Robert deYoung, Paul Evans, Pok-Sang Lam and Kenneth D. West More articles in Journal of Money, Credit and Banking from Blackwell Publishing |
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