Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153323
Authors: 
De Fiore, Fiorella
Tristani, Oreste
Year of Publication: 
2008
Series/Report no.: 
ECB Working Paper 889
Abstract: 
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).
Subjects: 
credit frictions
monetary policy
Natural rate of interest
JEL: 
E40
E50
G10
Document Type: 
Working Paper

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