Collateralized Borrowing and Risk Taking at Low Interest Rates

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

No 2016-2, Working Papers from University of Alberta, Department of Economics

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 doesn't 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)
Pages: 55 pages
Date: 2016-02-09
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

Downloads: (external link)
https://sites.ualberta.ca/~econwps/2016/wp2016-02.pdf Full text (application/pdf)

Related works:
Journal Article: Collateralized borrowing and risk taking at low interest rates (2016)
Working Paper: Collateralized Borrowing and Risk Taking at Low Interest Rates? (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ris:albaec:2016_002

Access Statistics for this paper

More papers in Working Papers from University of Alberta, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Joseph Marchand ().