The Financial (In)Stability Real Interest Rate, r**
Ozge Akinci (Federal Reserve Bank of New York)
Paper joints with Gianluca Benigno, Marco Del Negro, and Albert Queralto
Abstract:
We build a macro-finance model with an occasionally binding financing constraint where real interest rates have opposite effects on current and future financial stability, with the contemporaneous impact driven by valuation effects (akin to those triggering the 2023 banking turmoil) and the future impact driven by reach-for-yield by intermediaries. We use this model to illustrate the concept of the financial stability interest rate, r**, which we propose as a quantitative summary statistic for financial vulnerabilities. We provide a measure of r** for the U.S. economy and discuss its evolution over the past fifty years.
Sponsored by CEDEC.