1/ New paper: "FCI-star" with Ricardo Caballero and @TomasCaravello. We introduce FCI*—the neutral level of financial conditions that closes the output gap. Think of it as the analogue of r*, but for the broader financial conditions that actually drive monetary transmission

RT @VMRConstancio: @alpsimsek_econ @tomascaravello A relevant paper, presenting a possible improvement over the useless r-star. To be scru….

Thanks @nberpubs! Here's a thread breaking down our methodology and key findings - including why FCI* stayed stable after 2008 while r* crashed, and how FCI gaps captured the 2022 policy shift before rate gaps:.

Glad you found it interesting! Here's a thread breaking down the key findings:.

11/ Quick correction: My coauthor's handle is @tomycaravello. Apologies for the mix-up, Tomas!.

10/ Bottom line: Central banks should focus on financial conditions relative to their neutral level (FCI*), not just interest rates relative to r*. It's a better guide for what monetary policy is actually doing to the economy. Paper: /end 🧵.

9/ Policy implications:. - Financial conditions matter more than policy rates for economic impact. - Markets move faster than central bank actions BUT are also noisy. - We need frameworks that capture these realities: FCI* provides a more stable, comprehensive benchmark than r*.

8/ ⚡ FCI gaps provide superior real-time guidance during periods of rapid change. In 2022, FCI gaps correctly captured the sudden policy shift while interest rate gaps still showed accommodation well into 2023

7/ 📉 Large FCI gaps emerge because markets often move contrary to macroeconomic needs. During recessions: observed FCI typically tightens (financial distress) while FCI* loosens (economy needs stimulus). These gaps suggest there is room for policy improvements

6/ Three key empirical findings:. 📈 FCI* is more stable than r*. After 2008, r* plunged and stayed low as falling asset prices reduced spending and forced the Fed to cut rates. But FCI* remained stable because it tracks ONLY macro shocks & needs, not financial market volatility

5/ Our estimation approach follows Laubach-Williams . If there is an output gap, observed FCI is "wrong" relative to macro needs. Using estimated output gaps and the observed FCI, we can back out the neutral level FCI* that would close output gaps

4/ We use the FCI-G index from Fed economists that leverages the Fed's internal models to estimate how recent changes in financial markets affect output next year. Stocks and exchange rates are the main drivers, with housing important before and during the GFC

3/ This happens because monetary policy works through FINANCIAL CONDITIONS—long rates, asset prices, credit spreads so on—not policy rate itself. Yet we anchor everything around r*. Markets are forward looking and noisy, so effective policy deviates from what policy rate suggests.

2/ Why does this matter? . In 2022, monetary policy became tight in anticipation of rate hikes—months before the Fed raised rates. In 2024, policy became loose due to the stock boom, despite rates staying high. The policy rate alone is a terrible guide to effective policy stance

RT @cepr_org: New CEPR Discussion Paper - DP20362.FCI-Star.Ricardo Caballero & Tomás Caravello @MITEcon, Alp Simsek @alpsimsek_econ @YaleSO….

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Today is a sad day for Turkey, my home country. The popular mayor of Istanbul, who beat Erdogan's proxies twice in local elections, was detained on flimsy charges. Erdogan joins the ranks of cowards like Putin who use "legal" means to sideline opposition leaders they fear. Turkey.