DP15436 The Financial (In)Stability Real Interest Rate, R**

Author(s): Ozge Akinci, Gianluca Benigno, Marco Del Negro, Albert Queralto
Publication Date: November 2020
Keyword(s): Financial Amplification, financial crises, Occasionally Binding Credit Constraint, R**
JEL(s): E41, F3, G01
Programme Areas: Financial Economics, International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15436

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.