Toothless tiger with claws? Financial stability communication, expectations, and risk-taking

Johannes Beutel, Norbert Metiu and Valentin Stockerl

No 05/2021, Discussion Papers from Deutsche Bundesbank

Abstract: We study the effects of central bank communication about financial stability on individuals' expectations and risk-taking. Using a randomized information experiment, we show that communication causally affects individuals' beliefs and investment behavior, consistent with an expectations channel of financial stability communication. Individuals receiving a warning from the central bank expect a higher probability of a financial crisis and reduce their demand for risky assets. This reduction is driven by downward revisions in individuals' expected Sharpe ratios due to lower expected returns and higher perceived downside risks. In addition, these individuals deposit a smaller fraction of their savings at riskier banks.

Keywords: central bank communication; financial stability; stock market expectations; randomized information experiment (search for similar items in EconPapers)
JEL-codes: C11 D12 D83 D91 E58 G11 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-cba, nep-exp, nep-mac and nep-mon
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Citations: View citations in EconPapers (2)

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Journal Article: Toothless tiger with claws? Financial stability communication, expectations, and risk-taking (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:052021

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