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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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  1. Forbes, Kristin J. & Warnock, Francis E., 2012. "Capital flow waves: Surges, stops, flight, and retrenchment," Journal of International Economics, Elsevier, vol. 88(2), pages 235-251.
  2. Valentina Bruno & Hyun Song Shin, 2014. "Cross-border banking and global liquidity," BIS Working Papers 458, Bank for International Settlements.
  3. Sandra Eickmeier & Leonardo Gambacorta & Boris Hofmann, 2013. "Understanding Global Liquidity," BIS Working Papers 402, Bank for International Settlements.
  4. Taylor, John B., 2013. "International monetary coordination and the great deviation," Journal of Policy Modeling, Elsevier, vol. 35(3), pages 463-472.
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  9. Shin, Hyun Song & Adrian, Tobias, 2008. "Financial intermediaries, financial stability and monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 287-334.
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  11. Geert Bekaert & Marie Hoerova & Marco Lo Duca, 2012. "Risk, uncertainty and monetary policy," Working Paper Research 229, National Bank of Belgium.
  12. Patrick McGuire & Goetz von Peter, 2009. "The US dollar shortage in global banking and the international policy response," BIS Working Papers 291, Bank for International Settlements.
  13. Moritz Schularick & Alan M. Taylor, 2009. "Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870-2008," NBER Working Papers 15512, National Bureau of Economic Research, Inc.
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  15. 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, vol. 10(2), pages 123-139, Spring.
  16. John Taylor, 2007. "Housing and Monetary Policy," Discussion Papers 07-003, Stanford Institute for Economic Policy Research.
  17. Hyun Song Shin, 2012. "Global Banking Glut and Loan Risk Premium," IMF Economic Review, Palgrave Macmillan, vol. 60(2), pages 155-192, July.
  18. Bank for International Settlements, 2010. "Funding patterns and liquidity management of internationally active banks," CGFS Papers, Bank for International Settlements, number 39, Autumn.
  19. Kasper Lund-Jensen, 2012. "Monitoring Systemic Risk Basedon Dynamic Thresholds," IMF Working Papers 12/159, International Monetary Fund.
  20. Gourinchas, Pierre-Olivier & Obstfeld, Maurice, 2011. "Stories of the Twentieth Century for the Twenty-First," CEPR Discussion Papers 8518, C.E.P.R. Discussion Papers.
  21. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  22. Patrick McGuire & Goetz von Peter, 2009. "The US dollar shortage in global banking," BIS Quarterly Review, Bank for International Settlements, March.
  23. Kenneth A. Froot & Tarun Ramadorai, 2005. "Currency Returns, Intrinsic Value, and Institutional-Investor Flows," Journal of Finance, American Finance Association, vol. 60(3), pages 1535-1566, 06.
  24. Hyun Song Shin & Erkko Etula & Tobias Adrian, 2010. "Risk Appetite and Exchange Rates," 2010 Meeting Papers 311, Society for Economic Dynamics.
  25. Naohiko Baba & Robert N McCauley & Srichander Ramaswamy, 2009. "US dollar money market funds and non-US banks," BIS Quarterly Review, Bank for International Settlements, March.
  26. Shin, Hyun Song, 2013. "The second phase of global liquidity and its impact on emerging economies," Proceedings, Federal Reserve Bank of San Francisco, issue Nov, pages 1-10.
  27. Giovanni Dell'Ariccia & Luc Laeven & Gustavo Suarez, 2013. "Bank Leverage and Monetary Policy's Risk-Taking Channel: Evidence from the United States," IMF Working Papers 13/143, International Monetary Fund.
  28. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and leverage," Staff Reports 328, Federal Reserve Bank of New York.
  29. Lane, Philip R. & Pels, Barbara, 2012. "Current Account Imbalances in Europe," CEPR Discussion Papers 8958, C.E.P.R. Discussion Papers.
  30. 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.
  31. Nicola Cetorelli & Linda S. Goldberg, 2012. "Banking Globalization and Monetary Transmission," Journal of Finance, American Finance Association, vol. 67(5), pages 1811-1843, October.
  32. Lustig, Hanno & Roussanov, Nikolai & Verdelhan, Adrien, 2014. "Countercyclical currency risk premia," Journal of Financial Economics, Elsevier, vol. 111(3), pages 527-553.
  33. Sally F. (Sally Fangnan) Chen & Philip Liu & Andrea M. Maechler & Chris Marsh & Sergejs Saksonovs & Hyun Song Shin, 2012. "Exploring the Dynamics of Global Liquidity," IMF Working Papers 12/246, International Monetary Fund.
  34. James H. Stock & Mark W. Watson, 2001. "Vector Autoregressions," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 101-115, Fall.
  35. Eichenbaum, Martin & Evans, Charles L, 1995. "Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 975-1009, November.
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