The Financial (In)Stability Real Interest Rate, R**
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 accompanied 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.
File(s): File format is application/pdf https://www.federalreserve.gov/econres/ifdp/files/ifdp1308.pdf
Part of Series: International Finance Discussion Papers
Publication Date: 2021-01-29