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Financial Vulnerability and Macroeconomic Fragility

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Abstract

What is the effect of a hike in interest rates on the economy? Building on recent research, we argue in this post that the answer to this question very much depends on how vulnerable the financial system is. We measure financial vulnerability using a novel concept—the financial stability interest rate r** (or “r-double-star”)—and show that, empirically, the economy is more sensitive to shocks when the gap between r** and current real rates is small or negative.

Suggested Citation

  • Ozge Akinci & Gianluca Benigno & Marco Del Negro & Ethan Nourbash & Albert Queraltó, 2023. "Financial Vulnerability and Macroeconomic Fragility," Liberty Street Economics 20230522, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:96184
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    File URL: https://libertystreeteconomics.newyorkfed.org/2023/05/financial-vulnerability-and-macroeconomic-fragility/
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    More about this item

    Keywords

    financial crises; nonlinear dynamics; shocks; financial stability;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G2 - Financial Economics - - Financial Institutions and Services
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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