Discussion paper

DP15436 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.

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Citation

Benigno, G, O Akinci Emekli, M Del Negro and A Queralto (eds) (2020), “DP15436 The Financial (In)Stability Real Interest Rate, R**”, CEPR Press Discussion Paper No. 15436. https://new.cepr.org/publications/dp15436