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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.

Suggested Citation

  • Valentina Bruno & Hyun Song Shin, 2012. "Capital Flows and the Risk-Taking Channel of Monetary Policy," BIS Working Papers 400, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:400
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    More about this item

    Keywords

    Capital flows; exchange rate appreciation; credit booms;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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