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Capital Flows and the Risk-Taking Channel of Monetary Policy

  • Valentina Bruno
  • Hyun Song Shin

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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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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  20. Bank for International Settlements, 2010. "Funding patterns and liquidity management of internationally active banks," CGFS Papers, Bank for International Settlements, number 39, Autumn.
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  25. Borio, Claudio & Zhu, Haibin, 2012. "Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?," Journal of Financial Stability, Elsevier, vol. 8(4), pages 236-251.
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