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

24 Pages Posted: 9 Nov 2020

See all articles by Ozge Akinci

Ozge Akinci

Federal Reserve Bank of New York

Gianluca Benigno

London School of Economics & Political Science (LSE) - Department of Economics; Federal Reserve Bank of New York

Marco Del Negro

Federal Reserve Bank of New York

Albert Queralto

Board of Governors of the Federal Reserve System

Date Written: November 2020

Abstract

We introduce the concept of a 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 conditions index and show how it is related to the gap between the natural and financial stability interest rates.

Keywords: r**, financial crises, financial stability, occasionally binding credit constraint

JEL Classification: E4, E5, G0

Suggested Citation

Akinci, Ozge and Benigno, Gianluca and Benigno, Gianluca and Del Negro, Marco and Queralto, Albert, The Financial (In)Stability Real Interest Rate, R** (November 2020). FRB of New York Staff Report No. 946, Available at SSRN: https://ssrn.com/abstract=3727406 or http://dx.doi.org/10.2139/ssrn.3727406

Ozge Akinci

Federal Reserve Bank of New York ( email )

New York, NY 10045
United States

Gianluca Benigno

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 7807 (Phone)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Marco Del Negro (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Albert Queralto

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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