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Financial Stability and Interest Rates

Ozge Akinci, Gianluca Benigno, Marco Del Negro, Ethan Nourbash and Albert Queraltó
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Albert Queraltó: https://www.federalreserve.gov/econres/albert-queralto.htm

No 20230523, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: In a recent research paper we argue that interest rates have very different consequences for current versus future financial stability. In the short run, lower real rates mean higher asset prices and hence higher net worth for financial institutions. In the long run, lower real rates lead intermediaries to shift their portfolios toward risky assets, making them more vulnerable over time. In this post, we use a model to highlight the challenging trade-offs faced by policymakers in setting interest rates.

Keywords: financial stability; monetary policy; Dynamic Stochastic General Equilibrium (DSGE) models; rates; nonlinear responses; shocks; fire sale (search for similar items in EconPapers)
JEL-codes: E2 E4 E5 G2 (search for similar items in EconPapers)
Date: 2023-05-23
New Economics Papers: this item is included in nep-ban, nep-dge, nep-fdg, nep-mon and nep-opm
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