Capital Flows and the Risk-Taking Channel of Monetary Policy

Valentina Bruno and Hyun Song Shin

No 400, BIS Working Papers from Bank for International Settlements

Abstract: This paper examines the relationship between low interests maintained by advanced economy central banks and credit booms in emerging economies. In a model with crossborder banking, low funding rates increase credit supply, but the initial shock is amplified through the "risk-taking channel" of monetary policy where greater risk-taking interacts with dampened measured risks that are driven by currency appreciation to create a feedback loop. In an empirical investigation using VAR analysis, we find that expectations of lower short-term rates dampen measured risks and stimulate cross-border banking sector capital flows.

Keywords: Capital flows; exchange rate appreciation; credit booms (search for similar items in EconPapers)
Pages: 57 pages
Date: 2012-12
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (50)

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Related works:
Journal Article: Capital flows and the risk-taking channel of monetary policy (2015)
Working Paper: Capital Flows and the Risk-Taking Channel of Monetary Policy (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:400

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