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Capital Flows and the Risk-Taking Channel of Monetary Policy

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  • Valentina Bruno
  • Hyun Song Shin

Abstract

We study the dynamics linking monetary policy with bank leverage and show that adjustments in leverage act as the linchpin in the monetary transmission mechanism that works through fluctuations in risk-taking. Motivated by the evidence, we formulate a model of the "risk-taking channel" of monetary policy in the international context that rests on the feedback loop between increased leverage of global banks and capital flows amid currency appreciation for capital recipient economies.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18942.

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Date of creation: Apr 2013
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Handle: RePEc:nbr:nberwo:18942

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  1. Harald Hau & Hélène Rey, 2008. "Global Portfolio Rebalancing Under the Microscope," NBER Working Papers 14165, National Bureau of Economic Research, Inc.
  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, American Economic Association, vol. 10(2), pages 123-139, Spring.
  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. 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.
  5. 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.
  6. John B. Taylor, 2007. "Housing and monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 463-476.
  7. Schularick, Moritz & Taylor, Alan M., 2009. "Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870-2008," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7570, C.E.P.R. Discussion Papers.
  8. 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.
  9. 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.
  10. 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.
  11. 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.
  12. Lane, Philip R. & Pels, Barbara, 2012. "Current Account Imbalances in Europe," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8958, C.E.P.R. Discussion Papers.
  13. 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.
  14. Giovanni Lombardo & Luca Dedola, 2010. "Financial Frictions, Financial Integration and the International Propagation of Shocks," 2010 Meeting Papers, Society for Economic Dynamics 288, Society for Economic Dynamics.
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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. 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.
  2. 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.
  3. Alessandro Barattieri & Maya Eden & Dalibor Stevanovic, 2013. "The Connection between Wall Street and Main Street: Measurement and Implications for Monetary Policy," Cahiers de recherche, CIRPEE 1331, CIRPEE.
  4. 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.
  5. Claudio Borio, 2014. "Monetary policy and financial stability: what role in prevention and recovery?," BIS Working Papers 440, Bank for International Settlements.
  6. John B. Taylor, 2013. "International Monetary Coordination and the Great Deviation," Discussion Papers, Stanford Institute for Economic Policy Research 12-008, Stanford Institute for Economic Policy Research.
  7. 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.
  8. Valentina Bruno & Hyun Song Shin, 2013. "Capital Flows, Cross-Border Banking and Global Liquidity," NBER Working Papers 19038, National Bureau of Economic Research, Inc.
  9. 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.).
  10. 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.
  11. 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.
  12. 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.
  13. 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.
  14. 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.
  15. 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.
  16. 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.
  17. Ignacio Lozano & Alexander Guarín, 2014. "Banking Fragility in Colombia: An Empirical Analysis Based on Balance Sheets," BORRADORES DE ECONOMIA 011145, BANCO DE LA REPÚBLICA.
  18. 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.

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