The Financial (In)Stability Real Interest Rate, r**
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.
Gianluca Benigno is currently a Professor of Economics at the University of Lausanne. He has been Head of the International Studies Department at the Federal Reserve Bank of New York and tenured Professor at the London School of Economics.
He gained his Ph.D. in International Macroeconomics from the University of California, Berkeley. He has published extensively on exchange rate economics, international monetary policy cooperation, monetary, macroprudential, and fiscal policies, and on secular stagnation. Along with his colleagues at the Federal Reserve Bank of New York, he has developed the Global Supply Chain Pressure Index and the concept of R**.