Risk‐taking channel of monetary policy

Tobias Adrian, Arturo Estrella and Hyun Song Shin

Financial Management, 2019, vol. 48, issue 3, 725-738

Abstract: One of the most robust stylized facts in macroeconomics is the forecasting power of the term spread for future real activity. We propose a possible causal mechanism for the forecasting power of the term spread, deriving from the balance sheet management of financial intermediaries and the “risk‐taking channel of monetary policy.” Monetary tightening leads to the flattening of the term spread, reducing net interest margin and credit supply. We provide empirical support for the risk‐taking channel.

Date: 2019
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https://doi.org/10.1111/fima.12256

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Working Paper: Risk-Taking Channel of Monetary Policy (2018)
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