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Re-exploring the nexus between monetary policy and banks' risk-taking

Melchisedek Joslem Ngambou Djatche

Economic Modelling, 2019, vol. 82, issue C, 294-307

Abstract: In this paper, we analyse the link between monetary policy and banks' risk-taking behaviour. Some theoretical and empirical studies show that monetary easing increases banks' appetite for risk related to asset valuation and the search for higher yield. However, the low interest rate environment that began in 2010 is casting doubt on these findings. Our study adds to analyses of the monetary risk-taking channel considering non-linearity, especially testing threshold effects in this channel. Using a dataset of US banks, we find that the impact of low interest rates on banks' risk behaviour depends on the previous monetary regime, that is on the deviation of monetary rates from the Taylor rule. We complement the literature on the Taylor rule and provide arguments that extend the use of the Taylor rule by Central Banks to financial stability purposes.

Keywords: Monetary policy; Financial stability; Bank risk-taking; Non-dynamic panel threshold model (search for similar items in EconPapers)
JEL-codes: E44 E58 G21 (search for similar items in EconPapers)
Date: 2019
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Working Paper: Re-exploring the nexus between monetary policy and banks'risk-taking (2019)
Working Paper: Re-Exploring the Nexus between Monetary Policy and Banks' Risk-Taking (2018) Downloads
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DOI: 10.1016/j.econmod.2019.01.016

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