EconPapers    
Economics at your fingertips  
 

Capital regulation, risk-taking and monetary policy: a missing link in the transmission mechanism?

Claudio Borio and Haibin Zhu

No 268, BIS Working Papers from Bank for International Settlements

Abstract: Few areas of monetary economics have been studied as extensively as the transmission mechanism. The literature on this topic has evolved substantially over the years, following the waxing and waning of conceptual frameworks and the changing characteristics of the financial system. In this paper, taking as a starting point a brief overview of the extant work on the interaction between capital regulation, the business cycle and the transmission mechanism, we offer some broader reflections on the characteristics of the transmission mechanism in light of the evolution of the financial system. We argue that insufficient attention has so far been paid to the link between monetary policy and the perception and pricing of risk by economic agents - what might be termed the "risk-taking channel" of monetary policy. We develop the concept, compare it with current views of the transmission mechanism, explore its mutually reinforcing link with "liquidity" and analyse its interaction with monetary policy reaction functions. We argue that changes in the financial system and prudential regulation may have increased the importance of the risk-taking channel and that prevailing macroeconomic paradigms and associated models are not well suited to capturing it, thereby also reducing their effectiveness as guides to monetary policy.

Keywords: risk-taking channel; transmission mechanism; capital regulation; procyclicality (search for similar items in EconPapers)
Pages: 45 pages
Date: 2008-12
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (426)

Downloads: (external link)
http://www.bis.org/publ/work268.pdf Full PDF document (application/pdf)
http://www.bis.org/publ/work268.htm (text/html)

Related works:
Journal Article: Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism? (2012) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:268

Access Statistics for this paper

More papers in BIS Working Papers from Bank for International Settlements Contact information at EDIRC.
Bibliographic data for series maintained by Martin Fessler ().

 
Page updated 2025-03-22
Handle: RePEc:bis:biswps:268