Monetary policy and the asset risk-taking channel
Angela Abbate () and
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Angela Abbate: Swiss National Bank
No 1805, Working Papers from Banco de España, Working Papers Homepage
How important is the risk-taking channel for monetary policy? To answer this question, we develop and estimate a quantitative monetary DSGE model where banks choose excessively risky investments, due to an agency problem which distorts banks’ incentives. As the real interest rate declines, these distortions become more important and excessive risk taking increases, lowering the efficiency of investment. We show that this novel transmission channel generates a new and quantitatively significant monetary policy trade-off between inflation and real interest rate stabilization: it is optimal for the central bank to tolerate greater inflation volatility in exchange for lower risk taking.
Keywords: bank risk; monetary policy; DSGE models (search for similar items in EconPapers)
JEL-codes: E12 E44 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Working Paper: Monetary policy and the asset risk-taking channel (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1805
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