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Monetary Policy and Risk Taking

Source:
Journal of Economic Dynamics and Control, Vol. 52, pp. 285–307
Year:
2015
Authors:
Ignazio Angeloni,
Ester Faia,
Marco Lo Duca
Reseach Area:
Macro Finance
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 is particularly significant on the bank funding side. Then, to rationalize this evidence we build a macroeconomic 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.

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