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Discussion Paper Details

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

Author(s): Ozge Akinci, Gianluca Benigno, Marco Del Negro and Albert Queralto

Publication Date: November 2020

Keyword(s): Financial Amplification, financial crises, Occasionally Binding Credit Constraint and R**

Programme Area(s): Financial Economics, International Macroeconomics and Finance and Monetary Economics and Fluctuations

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.

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Bibliographic Reference

Akinci, O, Benigno, G, Del Negro, M and Queralto, A. 2020. 'The Financial (In)Stability Real Interest Rate, R**'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=15436