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Monetary policy and the asset risk-taking channel

Author

Listed:
  • Angela Abbate

    () (Swiss National Bank)

  • Dominik Thaler

    () (Banco de España)

Abstract

How important is the risk-taking channel for monetary policy? To answer this question, we develop and estimate a quantitative monetary DSGE model where banks choose excessively risky investments, due to an agency problem which distorts banks’ incentives. As the real interest rate declines, these distortions become more important and excessive risk taking increases, lowering the efficiency of investment. We show that this novel transmission channel generates a new and quantitatively significant monetary policy trade-off between inflation and real interest rate stabilization: it is optimal for the central bank to tolerate greater inflation volatility in exchange for lower risk taking.

Suggested Citation

  • Angela Abbate & Dominik Thaler, 2018. "Monetary policy and the asset risk-taking channel," Working Papers 1805, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:1805
    as

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    File URL: https://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/18/Files/dt1805e.pdf
    File Function: First version, February 2018
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    References listed on IDEAS

    as
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    Cited by:

    1. Matthias Neuenkirch & Matthias Nöckel, 2017. "The Risk-Taking Channel of Monetary Policy Transmission in the Euro Area," Research Papers in Economics 2017-02, University of Trier, Department of Economics.
    2. repec:ulp:buopee:v:36:y:2017:m:06:i:3 is not listed on IDEAS

    More about this item

    Keywords

    bank risk; monetary policy; DSGE models;

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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