Monetary policy and the asset risk-taking channel

No 1805, Working Papers from Banco de España

Abstract: How important is the risk-taking channel for monetary policy? To answer this question, we develop and estimate a quantitative monetary DSGE model where banks choose excessively risky investments, due to an agency problem which distorts banks’ incentives. As the real interest rate declines, these distortions become more important and excessive risk taking increases, lowering the efficiency of investment. We show that this novel transmission channel generates a new and quantitatively significant monetary policy trade-off between inflation and real interest rate stabilization: it is optimal for the central bank to tolerate greater inflation volatility in exchange for lower risk taking.

Keywords: bank risk; monetary policy; DSGE models (search for similar items in EconPapers)
JEL-codes: E12 E44 E58 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2018-02
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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https://www.bde.es/f/webbde/SES/Secciones/Publicac ... 18/Files/dt1805e.pdf First version, February 2018 (application/pdf)

Related works:
Journal Article: Monetary Policy and the Asset Risk‐Taking Channel (2019)
Working Paper: Monetary policy and the asset risk-taking channel (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1805

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