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

Özge Akıncı | Zendy; Gianluca Benigno | Zendy; Marco Del Negro | Zendy; Albert Queraltó | Zendy

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

Author(s) -

Özge Akıncı,

Gianluca Benigno,

Marco Del Negro,

Albert Queraltó

Publication year - 2021

Publication title -

international finance discussion paper

Language(s) - English

Resource type - Journals

eISSN - 2767-4509

pISSN - 1073-2500

DOI - 10.17016/ifdp.2021.1308

Subject(s) - interest rate , leverage (statistics) , constraint (computer aided design) , financial stability , economics , real interest rate , stability (learning theory) , financial sector , financial market , index (typography) , finance , monetary economics , financial system , mathematics , computer science , artificial intelligence , geometry , machine learning , world wide web

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 accom- panied 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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