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Capital Flows and the Risk-Taking Channel of Monetary Policy

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  • Valentina Bruno
  • Hyun Song Shin
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    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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    Related research

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

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    References

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    1. Tobias Adrian & Hyun Song Shin, 2008. "Financial intermediaries, financial stability, and monetary policy," Staff Reports 346, Federal Reserve Bank of New York.
    2. 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, vol. 10(2), pages 123-139, Spring.
    3. Michael B. Devereux & James Yetman, 2010. "Leverage Constraints and the International Transmission of Shocks," Working Papers 132010, Hong Kong Institute for Monetary Research.
    4. Giovanni Lombardo & Luca Dedola, 2010. "Financial Frictions, Financial Integration and the International Propagation of Shocks," 2010 Meeting Papers 288, Society for Economic Dynamics.
    5. Philip R. Lane & Barbara Pels, 2012. "Current Account Imbalances in Europe," The Institute for International Integration Studies Discussion Paper Series iiisdp397, IIIS.
    6. Kristin J. Forbes & Francis E. Warnock, 2011. "Capital Flow Waves: Surges, Stops, Flight, and Retrenchment," NBER Working Papers 17351, National Bureau of Economic Research, Inc.
    7. John B. Taylor, 2007. "Housing and Monetary Policy," NBER Working Papers 13682, National Bureau of Economic Research, Inc.
    8. Hau, Harald & Rey, Hélène, 2008. "Global Portfolio Rebalancing Under the Microscope," CEPR Discussion Papers 6901, C.E.P.R. Discussion Papers.
    9. Claudio Borio & Haibin Zhu, 2008. "Capital regulation, risk-taking and monetary policy: a missing link in the transmission mechanism?," BIS Working Papers 268, Bank for International Settlements.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    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. Rossi, José Luiz Júnior, 2013. "Liquidity and Exchange Rates," Insper Working Papers wpe_325, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
    2. Claudio Borio, 2014. "Monetary policy and financial stability: what role in prevention and recovery?," BIS Working Papers 440, Bank for International Settlements.
    3. Taylor, John B., 2013. "International monetary coordination and the great deviation," Journal of Policy Modeling, Elsevier, vol. 35(3), pages 463-472.
    4. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2011. "Macroprudential Regulation and the Monetary Transmission Mechanism," Working Papers Series 254, Central Bank of Brazil, Research Department.
    5. Rossi, José Luiz Júnior, 2014. "The Usefulness of Financial Variables in Predicting Exchange Rate Movements," Insper Working Papers wpe_332, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
    6. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2013. "Inflation Targeting and Financial Stability: A Perspective from the Developing World," Working Papers Series 324, Central Bank of Brazil, Research Department.

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