Angelo Rondina Neto

The mainstream macroeconomic approach has often been criticized for not considering distributional effects, particularly since the 2008 crisis. The non-consideration of distributional influences may lead to models and analyses that ignore the relationship between income distribution and important macroeconomic variables such as the natural interest rate (NIR). The main objective of this research is to analyze the role of income distribution on the NIR in a theoretical framework as well as empirically using data from July 1994 to December 2016 for Brazil. A New Keynesian model is extended to consider, theoretically, the relationship between income distribution and the NIR. A Vector Autoregressive (VAR) and a State-Space model are utilized to assess the effects of income inequality on the NIR. The theoretical as well as the empirical results provide evidence of a possible positive impact of income inequality on the NIR for Brazil. This result goes in line with the initial hypothesis and corroborates Brazilian stylized facts and theoretical considerations based on the New Keynesian model developed in this research. The empirical estimates, however, should be taken with caution because the significance of the coefficients depends on model specification.