Monetary policy and risk taking

Ignazio Angeloni (), Ester Faia and Marco Lo Duca

No 8, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: We assess the effects of monetary policy on bank risk to verify the existence of a risk-taking channel - monetary expansions inducing banks to assume more risk. We first present VAR evidence confirming that this channel exists and tends to concentrate on the bank funding side. Then, to rationalize this evidence we build a macro model where banks subject to runs endogenously choose their funding structure (deposits vs. capital) and risk level. A monetary expansion increases bank leverage and risk. In turn, higher bank risk in steady state increases asset price volatility and reduces equilibrium output.

Keywords: bank runs; risk taking; monetary policy (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (30)

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Related works:
Journal Article: Monetary policy and risk taking (2015)
Working Paper: Monetary Policy and Risk Taking (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:8

DOI: 10.2139/ssrn.2230335

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