Report
The Financial (In)Stability Real Interest Rate, R**
Abstract: We build a macro-finance model with an occasionally binding financing constraint where real interest rates have opposite effects on current and future financial stability, with the contemporaneous impact driven by valuation effects (akin to those triggering the 2023 banking turmoil) and the future impact driven by reach-for-yield by intermediaries. We use this model to illustrate the concept of the financial stability interest rate, r**, which we propose as a quantitative summary statistic for financial vulnerabilities. We provide a measure of r** for the U.S. economy and discuss its evolution over the past fifty years.
Keywords: r**; financial crises; financial stability; occasionally binding constraints;
JEL Classification: E4; E5; G0;
Access Documents
File(s):
File format is application/pdf
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr946.pdf
Description: Full text
File(s):
File format is text/html
https://www.newyorkfed.org/research/staff_reports/sr946
Description: Summary
Bibliographic Information
Provider: Federal Reserve Bank of New York
Part of Series: Staff Reports
Publication Date: 2020-11-01
Number: 946
Note: Revised May 2023.