1.0Liberty Street Economicshttps://libertystreeteconomics.newyorkfed.orgmaureeneganhttps://libertystreeteconomics.newyorkfed.org/author/maureenegan-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2-2/rich600338<blockquote class="wp-embedded-content" data-secret="aDheL6tF3Q"><a href="https://libertystreeteconomics.newyorkfed.org/2023/05/financial-vulnerability-and-macroeconomic-fragility/">Financial Vulnerability and Macroeconomic Fragility</a></blockquote><iframe sandbox="allow-scripts" security="restricted" src="https://libertystreeteconomics.newyorkfed.org/2023/05/financial-vulnerability-and-macroeconomic-fragility/embed/#?secret=aDheL6tF3Q" width="600" height="338" title="“Financial Vulnerability and Macroeconomic Fragility” — Liberty Street Economics" data-secret="aDheL6tF3Q" frameborder="0" marginwidth="0" marginheight="0" scrolling="no" class="wp-embedded-content"></iframe><script> /*! This file is auto-generated */ !function(d,l){"use strict";l.querySelector&&d.addEventListener&&"undefined"!=typeof URL&&(d.wp=d.wp||{},d.wp.receiveEmbedMessage||(d.wp.receiveEmbedMessage=function(e){var t=e.data;if((t||t.secret||t.message||t.value)&&!/[^a-zA-Z0-9]/.test(t.secret)){for(var s,r,n,a=l.querySelectorAll('iframe[data-secret="'+t.secret+'"]'),o=l.querySelectorAll('blockquote[data-secret="'+t.secret+'"]'),c=new RegExp("^https?:$","i"),i=0;i<o.length;i++)o[i].style.display="none";for(i=0;i<a.length;i++)s=a[i],e.source===s.contentWindow&&(s.removeAttribute("style"),"height"===t.message?(1e3<(r=parseInt(t.value,10))?r=1e3:~~r<200&&(r=200),s.height=r):"link"===t.message&&(r=new URL(s.getAttribute("src")),n=new URL(t.value),c.test(n.protocol))&&n.host===r.host&&l.activeElement===s&&(d.top.location.href=t.value))}},d.addEventListener("message",d.wp.receiveEmbedMessage,!1),l.addEventListener("DOMContentLoaded",function(){for(var e,t,s=l.querySelectorAll("iframe.wp-embedded-content"),r=0;r<s.length;r++)(t=(e=s[r]).getAttribute("data-secret"))||(t=Math.random().toString(36).substring(2,12),e.src+="#?secret="+t,e.setAttribute("data-secret",t)),e.contentWindow.postMessage({message:"ready",secret:t},"*")},!1)))}(window,document); </script> https://libertystreeteconomics.newyorkfed.org/wp-content/uploads/sites/2/2023/05/LSE_2023_financial-post1_akinci-920_x_576.jpg920576What 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.