January 2021

The Financial (In)Stability Real Interest Rate, R**

Ozge Akinci, Gianluca Benigno, Marco Del Negro, and Albert Queralto

Abstract:

We introduce the concept of financial stability real interest rate using a macroeconomic banking model with an occasionally binding financing constraint as in Gertler and Kiyotaki (2010). The financial stability interest rate, r**, is the threshold interest rate that triggers the constraint being binding.

Increasing imbalances in the financial sector measured by an increase in leverage are accom- panied by a lower threshold that could trigger financial instability events. We also construct a theoretical implied financial condition index and show how it is related to the gap between the natural and financial stability interest rates.

DOI: https://doi.org/10.17016/IFDP.2021.1308

PDF: Full Paper

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Last Update: January 29, 2021