Monetary policy and risk taking

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 is particularly significant on the bank funding side. Then, to ration...

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Bibliographic Details
Published inJournal of economic dynamics & control Vol. 52; pp. 285 - 307
Main Authors Angeloni, Ignazio, Faia, Ester, Lo Duca, Marco
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.03.2015
Elsevier Sequoia S.A
Subjects
Asset pricing
Bank runs
Banks
Economic theory
Equilibrium
Macroeconomics
Monetary policy
Output
Risk assessment
Risk management
Risk taking
Studies
Vector-autoregressive models
Volatility
E5
Monetary policy
G01
Risk taking
E4
Bank runs
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Summary: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 is particularly significant on the bank funding side. Then, to rationalize this evidence we build a macroeconomic 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.
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ISSN:0165-1889
1879-1743
DOI:10.1016/j.jedc.2014.12.001