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FCI-star

Author

Listed:
  • Ricardo J. Caballero
  • Tomás E. Caravello
  • Alp Simsek

Abstract

Central banks rely on r∗—the neutral interest rate—to assess policy stance. However, monetary policy affects activity through broad financial conditions, not only the short-term rate. We propose FCI∗, the neutral level of a financial conditions index consistent with output at potential. Unlike r∗, FCI∗ is insulated from financial fluctuations: when asset prices move, FCI captures their estimated effect on output, leaving FCI∗ to reflect only what the macroeconomy requires. In U.S. data, r∗ co-moves with the equity premium; FCI∗ does not. FCI gaps provide useful real-time guidance on policy stance, especially when financial conditions diverge from the policy rate.

Suggested Citation

  • Ricardo J. Caballero & Tomás E. Caravello & Alp Simsek, 2025. "FCI-star," NBER Working Papers 33952, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:33952
    Note: AP EFG ME
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    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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