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Capital Flows and the Risk-Taking Channel of Monetary Policy

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  • Valentina Bruno
  • Hyun Song Shin

Abstract

This paper examines the relationship between low interests maintained by advanced economy central banks and credit booms in emerging economies. In a model with crossborder banking, low funding rates increase credit supply, but the initial shock is amplified through the "risk-taking channel" of monetary policy where greater risk-taking interacts with dampened measured risks that are driven by currency appreciation to create a feedback loop. In an empirical investigation using VAR analysis, we find that expectations of lower short-term rates dampen measured risks and stimulate cross-border banking sector capital flows.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 400.

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Length: 57 pages
Date of creation: Dec 2012
Date of revision:
Handle: RePEc:bis:biswps:400

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Keywords: Capital flows; exchange rate appreciation; credit booms;

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References

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  1. Kristin J. Forbes & Francis E. Warnock, 2011. "Capital Flow Waves: Surges, Stops, Flight, and Retrenchment," NBER Chapters, in: Global Financial Crisis National Bureau of Economic Research, Inc.
  2. James Yetman & Michael B. Devereux, 2010. "leverage constraints and the international transmission of shocks," 2010 Meeting Papers, Society for Economic Dynamics 1341, Society for Economic Dynamics.
  3. Zheng Liu & Daniel F. Waggoner & Tao Zha, 2010. "Sources of Macroeconomic Fluctuations: A Regime-switching DSGE Approach," Emory Economics, Department of Economics, Emory University (Atlanta) 1002, Department of Economics, Emory University (Atlanta).
  4. Moritz Schularick & Alan M. Taylor, 2009. "Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870–2008," NBER Working Papers 15512, National Bureau of Economic Research, Inc.
  5. Harald Hau & Hélène Rey, 2008. "Global Portfolio Rebalancing Under the Microscope," NBER Working Papers 14165, National Bureau of Economic Research, Inc.
  6. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1996. "Inflows of Capital to Developing Countries in the 1990s," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 10(2), pages 123-139, Spring.
  7. Tobias Adrian & Hyun Song Shin, 2008. "Financial intermediaries, financial stability, and monetary policy," Staff Reports, Federal Reserve Bank of New York 346, Federal Reserve Bank of New York.
  8. Luca Dedola & Giovanni Lombardo, 2012. "Financial frictions, financial integration and the international propagation of shocks," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 27(70), pages 319-359, 04.
  9. Pierre-Olivier Gourinchas & Maurice Obstfeld, 2011. "Stories of the Twentieth Century for the Twenty-First," NBER Working Papers 17252, National Bureau of Economic Research, Inc.
  10. John Taylor, 2007. "Housing and Monetary Policy," Discussion Papers, Stanford Institute for Economic Policy Research 07-003, Stanford Institute for Economic Policy Research.
  11. Philip R. Lane & Barbara Pels, 2012. "Current Account Imbalances in Europe," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp397, IIIS.
  12. Borio, Claudio & Zhu, Haibin, 2012. "Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?," Journal of Financial Stability, Elsevier, Elsevier, vol. 8(4), pages 236-251.
  13. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
  14. Nicola Cetorelli & Linda S. Goldberg, 2012. "Banking Globalization and Monetary Transmission," Journal of Finance, American Finance Association, American Finance Association, vol. 67(5), pages 1811-1843, October.
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Blog mentions

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  1. Le rôle des banques centrales lors du cycle financier selon Claudio Borio
    by ? in D'un champ l'autre on 2014-02-17 16:58:00
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Cited by:
  1. Philip Lane, 2013. "International Capital Flows and Domestic Financial Conditions: Lessons for Emerging Asia," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp438, IIIS.
  2. Valentina Bruno & Hyun Song Shin, 2013. "Capital Flows, Cross-Border Banking and Global Liquidity," Working Papers, Princeton University, Department of Economics, Center for Economic Policy Studies. 1468, Princeton University, Department of Economics, Center for Economic Policy Studies..
  3. Richhild Moessner, 2014. "International spillovers from US forward guidance to equity markets," DNB Working Papers, Netherlands Central Bank, Research Department 427, Netherlands Central Bank, Research Department.
  4. Torsten Ehlers & Frank Packer & Eli Remolona, 2014. "Infrastructure and Corporate Bond Markets in Asia," RBA Annual Conference Volume, Reserve Bank of Australia, in: Alexandra Heath & Matthew Read (ed.), Financial Flows and Infrastructure Financing Reserve Bank of Australia.
  5. Barattieri, Alessandro & Eden, Maya & Stevanovi, Dalibor, 2013. "The connection between Wall Street and Main Street : measurement and implications for monetary policy," Policy Research Working Paper Series 6667, The World Bank.
  6. John B. Taylor, 2013. "International Monetary Coordination and the Great Deviation," NBER Working Papers 18716, National Bureau of Economic Research, Inc.
  7. Elod Takáts & Abraham Vela, 2014. "International monetary policy transmission," BIS Papers chapters, in: Bank for International Settlements (ed.), The transmission of unconventional monetary policy to the emerging markets, volume 78, pages 25-44 Bank for International Settlements.
  8. Ignacio Lozano & Alexander Guarín, 2014. "Banking Fragility in Colombia: An Empirical Analysis Based on Balance Sheets," BORRADORES DE ECONOMIA 011145, BANCO DE LA REPÚBLICA.
  9. Rossi, José Luiz Júnior, 2014. "The Usefulness of Financial Variables in Predicting Exchange Rate Movements," Insper Working Papers, Insper Working Paper, Insper Instituto de Ensino e Pesquisa wpe_332, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  10. Blaise Gadanecz & Ken Miyajima & Jörg Urban, 2014. "How might EME central banks respond to the influence of global monetary factors?," BIS Papers chapters, in: Bank for International Settlements (ed.), The transmission of unconventional monetary policy to the emerging markets, volume 78, pages 45-69 Bank for International Settlements.
  11. Azis, Iwan J. & Yarcia, Damaris Lee, 2014. "How Capital Flows Affect Economy-Wide Vulnerability and Inequality: Flow-of-Funds Analysis of Selected Asian Economies," Working Papers on Regional Economic Integration, Asian Development Bank 136, Asian Development Bank.
  12. Rossi, José Luiz Júnior, 2013. "Liquidity and Exchange Rates," Insper Working Papers, Insper Working Paper, Insper Instituto de Ensino e Pesquisa wpe_325, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  13. Claudio Borio, 2014. "Monetary policy and financial stability: what role in prevention and recovery?," BIS Working Papers 440, Bank for International Settlements.
  14. Silvia Miranda Agrippino & Hélène Rey, 2013. "Funding Flows and Credit in Carry Trade Economies," RBA Annual Conference Volume, Reserve Bank of Australia, in: Alexandra Heath & Matthew Lilley & Mark Manning (ed.), Liquidity and Funding Markets Reserve Bank of Australia.
  15. Ignacio Lozano & Alexander Guarín, 2014. "Fragilidad Bancaria en Colombia: Un Análisis Basado en las Hojas de Balance," Borradores de Economia 813, Banco de la Republica de Colombia.
  16. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2013. "Inflation Targeting and Financial Stability: A Perspective from the Developing World," Working Papers Series, Central Bank of Brazil, Research Department 324, Central Bank of Brazil, Research Department.
  17. Bowman, David & Londono, Juan M. & Sapriza, Horacio, 2014. "U.S. Unconventional Monetary Policy and Transmission to Emerging Market Economies," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 1109, Board of Governors of the Federal Reserve System (U.S.).
  18. Akıncı, Özge, 2013. "Global financial conditions, country spreads and macroeconomic fluctuations in emerging countries," Journal of International Economics, Elsevier, Elsevier, vol. 91(2), pages 358-371.

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