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

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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.

Suggested Citation

  • Ozge Akinci & Gianluca Benigno & Marco Del Negro & Albert Queraltó, 2020. "The Financial (In)Stability Real Interest Rate, R*," Staff Reports 946, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:89011
    Note: Revised May 2023.
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    Keywords

    r**; financial crises; financial stability; occasionally binding constraints;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G0 - Financial Economics - - General

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