Credit and the natural rate of interest.

Arbeitspapier

We analyze the properties of the natural rate of interest in an economy where nominal debt contracts generate a spread between loan rates and the policy interest rate. In our model, monetary policy has real effects in the flexible-price equilibrium, because it affects the credit spread. Relying on a definition suitable for this environment, we demonstrate that: (i) the natural rate is independent of monetary policy and (ii) it delivers price stability, if used as the intercept of a monetary policy rule. The second result holds exactly if real balances are remunerated at a constant spread below policy interest rates, approximately otherwise. We also highlight, however, that the natural rate is not robust to model un-certainty. The natural rate reacts differently to aggregate shocks - not only quantitatively but also qualitatively - depending on the underlying model assumptions (e.g. whether or not financial markets are frictionless).

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 889

Classification and Topics

• Classification: Wirtschaft ; Money and Interest Rates: General ; Monetary Policy, Central Banking, and the Supply of Money and Credit: General ; General Financial Markets: General (includes Measurement and Data)
• Subject: credit frictions ; monetary policy ; Natural rate of interest ; Geldpolitik ; Zins ; Kreditmarkt ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): De Fiore, Fiorella ; Tristani, Oreste
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2008

Further information

• Handle: http://hdl.handle.net/10419/153323
• Last update: 10.03.2025, 11:44 AM CET