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Collateralized borrowing and risk taking at low interest rates

Author

Listed:
  • Cociuba, Simona E.
  • Shukayev, Malik
  • Ueberfeldt, Alexander

Abstract

Empirical evidence suggests financial intermediaries increase risky investments when interest rates are low. We develop a model consistent with this observation and ask whether the risks undertaken exceed the social optimum. Interest rate policy affects risk taking in the model through two opposing channels. First, low policy rates make riskier assets more attractive than safe bonds. Second, low policy rates reduce the amount of safe bonds available for collateralized borrowing in interbank markets. The calibrated model features excessive risk taking at the optimal policy. However, at low policy rates, collateral constraints tighten and risk taking does not exceed the social optimum.

Suggested Citation

  • Cociuba, Simona E. & Shukayev, Malik & Ueberfeldt, Alexander, 2016. "Collateralized borrowing and risk taking at low interest rates," European Economic Review, Elsevier, vol. 85(C), pages 62-83.
    • Handle: RePEc:eee:eecrev:v:85:y:2016:i:c:p:62-83
    DOI: 10.1016/j.euroecorev.2016.02.005
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    Cited by:

    1. Farboodi, Maryam & Jarosch, Gregor & Menzio, Guido & Wiriadinata, Ursula, 2025. "Intermediation as rent extraction," Journal of Economic Theory, Elsevier, vol. 227(C).
    2. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2021. "Capital requirements, risk-taking and welfare in a growing economy," Journal of Regulatory Economics, Springer, vol. 60(2), pages 167-192, December.
    3. Salisu, Afees A. & Vo, Xuan Vinh, 2021. "The behavior of exchange rate and stock returns in high and low interest rate environments," International Review of Economics & Finance, Elsevier, vol. 74(C), pages 138-149.
    4. repec:ers:journl:v:xxiv:y:2021:i:4b:p:585-611 is not listed on IDEAS
    5. Laséen, Stefan & Pescatori, Andrea & Turunen, Jarkko, 2017. "Systemic risk: A new trade-off for monetary policy?," Journal of Financial Stability, Elsevier, vol. 32(C), pages 70-85.
    6. Carvallo, Oscar & Pagliacci, Carolina, 2016. "Macroeconomic shocks, bank stability and the housing market in Venezuela," Emerging Markets Review, Elsevier, vol. 26(C), pages 174-196.
    7. Zhi, Bangdong & Wang, Xiaojun & Xu, Fangming, 2022. "Managing inventory financing in a volatile market: A novel data-driven copula model," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 165(C).
    8. Simona E. Cociuba & Malik Shukayev & Alexander Ueberfeldt, 2019. "Managing Risk Taking With Interest Rate Policy And Macroprudential Regulations," Economic Inquiry, Western Economic Association International, vol. 57(2), pages 1056-1081, April.
    9. Agur, Itai & Demertzis, Maria, 2013. "“Leaning against the wind” and the timing of monetary policy," Journal of International Money and Finance, Elsevier, vol. 35(C), pages 179-194.
    10. Agur, Itai & Demertzis, Maria, 2019. "Will macroprudential policy counteract monetary policy’s effects on financial stability?," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 65-75.
    11. Drees, Burkhard & Eckwert, Bernhard & Várdy, Felix, 2013. "Cheap money and risk taking: Opacity versus fundamental risk," European Economic Review, Elsevier, vol. 62(C), pages 114-129.
    12. Stephan Imhof & Cyril Monnet & Shengxing Zhang, 2018. "The Risk-Taking Channel of Liquidity Regulations and Monetary Policy," Diskussionsschriften dp1815, Universitaet Bern, Departement Volkswirtschaft.
    13. Simona Cociuba & Malik Shukayev & Alexander Ueberfeldt, 2013. "Interest Rate Policy and Financial Regulation: How to Control Excessive Risk Taking?," 2013 Meeting Papers 584, Society for Economic Dynamics.
    14. Colletaz, Gilbert & Levieuge, Grégory & Popescu, Alexandra, 2018. "Monetary policy and long-run systemic risk-taking," Journal of Economic Dynamics and Control, Elsevier, vol. 86(C), pages 165-184.
    15. Pierre-Richard Agénor & L. Pereira da Silva, 2016. "Capital Requirements, Risk Taking and Welfare in a Growing Economy," Centre for Growth and Business Cycle Research Discussion Paper Series 226, Economics, The Univeristy of Manchester.
    16. Amira Hakim & Eleftherios Thalassinos, 2021. "Risk Sharing, Macro-Prudential Policy and Welfare in an Overlapping Generations Model (OLG) Economy," European Research Studies Journal, European Research Studies Journal, vol. 0(4 - Part ), pages 585-611.

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    Keywords

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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