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Capital Flows and the Risk-Taking Channel of Monetary Policy

  • Valentina Bruno
  • Hyun Song Shin

We study the dynamics linking monetary policy with bank leverage and show that adjustments in leverage act as the linchpin in the monetary transmission mechanism that works through fluctuations in risk-taking. Motivated by the evidence, we formulate a model of the "risk-taking channel" of monetary policy in the international context that rests on the feedback loop between increased leverage of global banks and capital flows amid currency appreciation for capital recipient economies.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18942.

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Date of creation: Apr 2013
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Publication status: published as Bruno, Valentina & Shin, Hyun Song, 2015. "Capital flows and the risk-taking channel of monetary policy," Journal of Monetary Economics, Elsevier, vol. 71(C), pages 119-132.
Handle: RePEc:nbr:nberwo:18942
Note: IFM ME
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  1. Geert Bekaert & Marie Hoerova & Marco Lo Duca, 2012. "Risk, uncertainty and monetary policy," Working Paper Research 229, National Bank of Belgium.
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  13. 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.
  14. 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.
  15. Kasper Lund-Jensen, 2012. "Monitoring Systemic Risk Based on Dynamic Thresholds," IMF Working Papers 12/159, International Monetary Fund.
  16. Pierre-Olivier Gourinchas & Maurice Obstfeld, 2011. "Stories of the Twentieth Century for the Twenty-First," NBER Working Papers 17252, National Bureau of Economic Research, Inc.
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  18. James H. Stock & Mark W. Watson, 2001. "Vector Autoregressions," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 101-115, Fall.
  19. John B. Taylor, 2007. "Housing and Monetary Policy," NBER Working Papers 13682, National Bureau of Economic Research, Inc.
  20. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1993. "“Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," MPRA Paper 7125, University Library of Munich, Germany.
  21. Nicola Cetorelli & Linda S. Goldberg, 2012. "Banking Globalization and Monetary Transmission," Journal of Finance, American Finance Association, vol. 67(5), pages 1811-1843, October.
  22. 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.
  23. 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.
  24. Bank for International Settlements, 2010. "Funding patterns and liquidity management of internationally active banks," CGFS Papers, Bank for International Settlements, number 39, Autumn.
  25. John B. Taylor, 2013. "International Monetary Coordination and the Great Deviation," Discussion Papers 12-008, Stanford Institute for Economic Policy Research.
  26. Lustig, Hanno & Roussanov, Nikolai & Verdelhan, Adrien, 2014. "Countercyclical currency risk premia," Journal of Financial Economics, Elsevier, vol. 111(3), pages 527-553.
  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. Hyun Song Shin, 2012. "Global Banking Glut and Loan Risk Premium," IMF Economic Review, Palgrave Macmillan, vol. 60(2), pages 155-192, July.
  29. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  30. 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.
  31. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and leverage," Staff Reports 328, Federal Reserve Bank of New York.
  32. Tobias Adrian & Hyun Song Shin, 2008. "Financial intermediaries, financial stability, and monetary policy," Staff Reports 346, Federal Reserve Bank of New York.
  33. Valentina Bruno & Hyun Song Shin, 2015. "Cross-Border Banking and Global Liquidity," Review of Economic Studies, Oxford University Press, vol. 82(2), pages 535-564.
  34. Patrick McGuire & Goetz von Peter, 2009. "The US dollar shortage in global banking," BIS Quarterly Review, Bank for International Settlements, March.
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