International financial flows and the risk-taking channel

During the 1990s, the increased propensity to save in emerging market economies trig- gered massive inflows towards safe assets in the US; a few years later, rising dollar funding by global banks was concurrent to increasing inflows to high-yield US secu- rities. While it is well documented that foreign financial flows have eased financing conditions in the US through the compression of long-term yields, in this paper we also find significant negative effects on the credit spread and the VIX, suggesting a rele- vant risk appetite channel. Moreover, flows into the US corporate bond market, partly linked to the previous “saving glut” in emerging economies, also directly affected bank leverage, household indebtedness and the housing market. This evidence provides a new perspective on the “global banking glut”, complementary to the role of banks in the risk-taking channel of monetary policy.