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Capital Flows and Bank Risk-Taking

Author

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  • Pozo, Jorge

    (Banco Central de Reserva del Perú)

Abstract

I build up a framework to study the dynamics of the default probability of banks and the excess bank risk-taking in an emerging economy. I calibrate the model for the 1998 Peruvian economy. The novelty result is that an infinity-period model creates an intertemporal channel that amplifies banks' incentives to take excessive risk. I simulate the sudden stop that hit Peru in 1998 as a negative shock on the foreign borrowing limit of banks. The model accurately predicts the substantial short-term rise in the morosity rate through the rise of the excess bank risk-taking after the sudden stop.

Suggested Citation

  • Pozo, Jorge, 2019. "Capital Flows and Bank Risk-Taking," Working Papers 2019-017, Banco Central de Reserva del Perú.
  • Handle: RePEc:rbp:wpaper:2019-017
    as

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    File URL: https://www.bcrp.gob.pe/docs/Publicaciones/Documentos-de-Trabajo/2019/documento-de-trabajo-017-2019.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Sudden stop; bank risk-taking; prudential policy.;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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