The Natural Interest Rate in a Credit Economy

Orientador(a): Carlos Viana de Carvalho

This paper studies the natural rate of interest in a credit economy through two complementary approaches. First, we estimate a medium-scale New Keynesian DSGE model for Brazil that incorporates default risk, imperfect banking competition, and credit market frictions. Our findings show that banking market power and credit constraints affect the economy’s natural interest rate. We also document how macroeconomic shocks propagate through credit and financial channels, shifting the flexible-price benchmark rate. Second, we conduct a Monte Carlo experiment to assess whether including credit variables improves the recovery of the natural rate in empirical estimation. The results indicate substantial gains in accuracy when credit information is incorporated. Our framework captures key features of emerging markets and suggests that credit variables contain crucial information for properly measuring the natural rate and the stance of monetary policy.