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Monetary policy effects on bank risk taking

Author

Listed:
  • Angela Abbate

    (Deutsche Bundesbank and European University Institute, Department of Economics)

  • Dominik Thaler

    (European University Institute, Department of Economics)

Abstract

Motivated by VAR evidence on the risk-taking channel in the US, we develop a New Keynesian model where low levels of the risk-free rate induce banks to grant credit to riskier borrowers. In the model an agency problem between depositors and equity holders incentivizes banks to take excessive risk. As the real interest rate declines these incentives become stronger and risk taking increases. We estimate the model on US data using Bayesian techniques and assess optimal monetary policy conduct in the estimated model, assuming that the interest rate is the only available instrument. Our results suggest that in a risk taking channel environment, the monetary authority should seek to stabilize the path of the real interest rate, trading off more inflation volatility in exchange for less interest rate and output volatility.

Suggested Citation

  • Angela Abbate & Dominik Thaler, 2015. "Monetary policy effects on bank risk taking," Working Paper Research 287, National Bank of Belgium.
    • Handle: RePEc:nbb:reswpp:201509-287
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    Cited by:

    1. is not listed on IDEAS
    2. Eric Leeper & James Nason, 2014. "Bringing Financial Stability into Monetary Policy," CAEPR Working Papers 2014-003, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    3. Eric M. Leeper & James M. Nason, 2014. "Bringing Financial Stability into Monetary Policy," CAMA Working Papers 2014-72, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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    Keywords

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    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • 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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