An Empirical Study on the Risk-taking Channel of Monetary Policy in Korea (in Korean)

Won Hyung Choi () and Young Man Yoon ()
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Won Hyung Choi: Department of Economics, Incheon National University
Young Man Yoon: Department of Economics, Incheon National University

Economic Analysis (Quarterly), 2018, vol. 24, issue 4, 37-70

Abstract: This paper examines whether the risk-taking channel of monetary policy works in Korea. In order to empirically analyze, we use the panel data set which consists of data from financial statements of 17 Korean domestic banks and macro indicators such as interest rates and growth rate over the period from the first quarter of 2003 to the second quarter of 2015. The estimation results show that there is a consistent and significant inverse relationship between proxy variables of monetary policy stance and bank risk. This confirms that the risk-taking channel of monetary policy transmission exists in Korea. We find that the effect of monetary policy through the risk-taking channel is influenced by the number of consecutive quarters when the interest rate is below the benchmark interest rate and the level of nominal interest rate. The effect of an expansionary monetary policy on increasing bank’s risk-taking is alleviated as the period of relatively low interest rate is extended. And the effect of monetary policy on bank risk is smaller as the level of nominal interest rate is lower. It is also found that balance sheet channel and bank lending channel among other transmission channels of monetary policy could influence on bank risk. In terms of implications for monetary policy, empirical results suggest that the central bank should take the effect of monetary policy on bank risk-taking behavior into consideration ex-ante and also need to be more concerned with ex-post monitoring.

Keywords: Risk-taking Channel; Transmission Channels of Monetary Policy; Bank Risk; Monetary Policy; Pooled Mean Group Estimation (search for similar items in EconPapers)
JEL-codes: E44 E52 G21 (search for similar items in EconPapers)
Date: 2018
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