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Monetary policy and the asset risk-taking channel

Angela Abbate () and Dominik Thaler

No 48/2015, Discussion Papers from Deutsche Bundesbank

Abstract: Motivated by VAR evidence, we develop a monetary DSGE model where an agency problem between bank financiers, stemming from limited liability and unobservable risk taking, distorts banks' incentives leading them to choose excessively risky investments. A monetary policy expansion magnifies these distortions, increasing excessive risk taking and lowering the expected return on investment. We estimate the model on US data using Bayesian techniques and assess how this novel channel affects optimal monetary policy. Our results suggest that the monetary authority should stabilize the real interest rate, trading off more inflation volatility in exchange for less volatility in risk taking and output.

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
Date: 2015
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Related works:
Working Paper: Monetary policy and the asset risk-taking channel (2018) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:482015

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