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

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.

Keywords: r**, Financial crises, Financial stability, Occasionally binding credit constraint

JEL Classification: E40, E50, G00

Suggested Citation: 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* (January, 2021). International Finance Discussion Paper No. 1308, Available at SSRN: https://ssrn.com/abstract=3865426 or http://dx.doi.org/10.17016/IFDP.2021.1308