Working Paper: CEPR ID: DP15436
Authors: Gianluca Benigno; Ozge Akinci; Marco Del Negro; Albert Queralto
Abstract: 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 theconstraint 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.
Keywords: Financial Crises; Occasionally Binding Credit Constraint; Financial Amplification
JEL Codes: G01; F3; E41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Leverage (G32) | Financial Stability Real Interest Rate (r) (E43) |
| Financial Stability Real Interest Rate (r) (E43) | Financial Instability (F65) |
| Financial Condition Index (G32) | Gap between Natural and Financial Stability Interest Rates (E43) |
| Leverage (G32) | Financial Instability (F65) |