Monetary Policy and Risk Taking
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Date
2016-05-19
Author
Angeloni, Ignazio
Faia, Ester
Lo Duca, Marco
SAFE No.
8
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Abstract
We assess the effects of monetary policy on bank risk to verify the existence of a risk-taking channel — monetary expansions inducing banks to assume more risk. We first present VAR evidence confirming that this channel exists and tends to concentrate on the bank funding side. Then, to rationalize this evidence we build a macro model where banks subject to runs endogenously choose their funding structure (deposits vs. capital) and risk level. A monetary expansion increases bank leverage and risk.In turn, higher bank risk in steady state increases asset price volatility and reduces equilibrium output.
Research Area
Macro Finance
Keywords
bank runs, risk taking, monetary policy
JEL Classification
E5, G2
Research Data
Topic
Saving and Borrowing
Monetary Policy
Stability and Regulation
Monetary Policy
Stability and Regulation
Relations
1
Publication Type
Working Paper
Link to Publication
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- LIF-SAFE Working Papers [334]