Financial Vulnerability and Macroeconomic Fragility
Abstract: What is the effect of a hike in interest rates on the economy? Building on recent research, we argue in this post that the answer to this question very much depends on how vulnerable the financial system is. We measure financial vulnerability using a novel concept—the financial stability interest rate r** (or “r-double-star”)—and show that, empirically, the economy is more sensitive to shocks when the gap between r** and current real rates is small or negative.
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Provider: Federal Reserve Bank of New York
Part of Series: Liberty Street Economics
Publication Date: 2023-05-22