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Systemic Risk-Taking Channel of Domestic and Foreign Monetary Policy

João Barroso (), Sergio Souza and Solange Guerra

No 412, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: The paper investigates the impact of domestic and foreign monetary policy on two systemic risk indicators in Brazil, namely, the Default Correlation and the DebtRank, which summarize, respectively, the joint default probability of financial institutions and the contagion through the interbank market given a default event. Results show that the domestic policy rate has a robust and statistically significant inverse relation with systemic risk, consistent with the risk-taking channel of monetary policy extended here for correlated risks and network externalities. Results are similar for the foreign policy rate, although not statistically significant in the most recent sample, consistent with a lesser role of banks in the transmission of foreign shocks. Results are also similar for reserve requirement rates, but not statistically significant, consistent with its operation on a narrower transmission channel

New Economics Papers: this item is included in nep-cba and nep-mon
Date: 2016-01
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