We construct a dynamic general equilibrium model to assess the quantitative relationship between real interest rates and output fluctuations in the Brazilian economy from 1980 to 2001. When firms are subject to working capital restrictions, the model is consistent with both the cyclical volatilities of national income components and the countercyclical character of real interest rates. Simulations indicate that output fluctuations are quite sensitive to the persistence of interest rate oscillations. Non-structural econometric estimations of the dynamic IS curve are, therefore, susceptible to the Lucas' critique, and may misguide the Central Bank's policymaking. (Copyright: Elsevier)
Business cycles, working capital, emerging markets
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