Open AccessThe 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 papers
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.