Collateralized borrowing and risk taking at low interest rates

Simona Cociuba (), Malik Shukayev () and Alexander Ueberfeldt

European Economic Review, 2016, vol. 85, issue C, 62-83

Abstract: Empirical evidence suggests financial intermediaries increase risky investments when interest rates are low. We develop a model consistent with this observation and ask whether the risks undertaken exceed the social optimum. Interest rate policy affects risk taking in the model through two opposing channels. First, low policy rates make riskier assets more attractive than safe bonds. Second, low policy rates reduce the amount of safe bonds available for collateralized borrowing in interbank markets. The calibrated model features excessive risk taking at the optimal policy. However, at low policy rates, collateral constraints tighten and risk taking does not exceed the social optimum.

Keywords: Financial intermediation; Risk taking; Optimal interest rate policy (search for similar items in EconPapers)
JEL-codes: E44 E52 G11 G18 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (16)

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Related works:
Working Paper: Collateralized Borrowing and Risk Taking at Low Interest Rates (2016)
Working Paper: Collateralized Borrowing and Risk Taking at Low Interest Rates? (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:85:y:2016:i:c:p:62-83

DOI: 10.1016/j.euroecorev.2016.02.005

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