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Does a Low Interest Rate Environment Affect Risk Taking in Austria?

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Abstract

It has recently been arg ued that a prolonged period of low interest rates under benign economic conditions tends to produce excessive risk taking in financial markets. The mechanism by which monetary policy affects investors’ risk positions has been called the “risk-taking channel” of monetary policy. We discuss this channel and compare it with the more traditional broad credit channel. Furthermore, we provide new evidence on the existence of this channel, using Austrian firm and bank data taken from the OeNB’s credit register. In particular, we show that the expected default rates within Austrian banks’ business-loan portfolios increased during the period of low refinancing rates from 2003 to 2005. This result is new and important in at least two respects: first, we construct a measure of Austrian banks’ portfolio risk on the basis of a matched lender and borrower dataset. Second, we specifically identify the effect of a monetary policy regime which is characterized by interest rates that are held at a low level for too long, as opposed to the more traditional effect of monetary policy “shocks,” usually identified through quarter-on-quarter changes in short-term interest rates.

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File URL: http://www.oenb.at/dms/oenb/Publikationen/Volkswirtschaft/Monetary-Policy-and-the-Economy/2010/Monetary-Policy-and-the-Economy-Q4-10/chapters/mop_2010_q4_analyses02_tcm16-221655.pdf
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Bibliographic Info

Article provided by Oesterreichische Nationalbank (Austrian Central Bank) in its journal Monetary Policy & the Economy.

Volume (Year): (2010)
Issue (Month): 4 ()
Pages: 32–48

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Handle: RePEc:onb:oenbmp:y:2010:i:4:b:2

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Keywords: monetary policy; bank behavior; risk taking;

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  1. Giovanni Dell'Ariccia, 2010. "Monetary Policy and Bank Risk-Taking," IMF Staff Position Notes 2010/09, International Monetary Fund.
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Cited by:
  1. Ekin Ayse Ozsuca & Elif Akbostanci, 2012. "An Empirical Analysis of the Risk Taking Channel of Monetary Policy in Turkey," ERC Working Papers 1208, ERC - Economic Research Center, Middle East Technical University, revised Dec 2012.
  2. Ramayandi, Arief & Rawat, Umang & Tang, Hsiao Chink, 2014. "Can Low Interest Rates be Harmful: An Assessment of the Bank Risk-Taking Channel in Asia," Working Papers on Regional Economic Integration 123, Asian Development Bank.
  3. Yener Altunbas & Leonardo Gambacorta & David Marques-Ibanez, 2012. "Does monetary policy affect bank risk?," Working Papers 12002, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).

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