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Monetary policy effects on bank risk taking. National Bank of Belgium Working Paper No. 287

Abbate, Angela and Thaler, Dominik (2015) Monetary policy effects on bank risk taking. National Bank of Belgium Working Paper No. 287. [Working Paper]

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    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.

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    Item Type: Working Paper
    Uncontrolled Keywords: Bank Risk; Monetary policy; DSGE Models
    Subjects for non-EU documents: Countries > Belgium
    EU policies and themes > Policies & related activities > economic and financial affairs > monetary policy
    Subjects for EU documents: UNSPECIFIED
    EU Series and Periodicals: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > National Bank of Belgium (Brussels) > Working Papers
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 09 Sep 2019 11:07
    Number of Pages: 43
    Last Modified: 09 Sep 2019 11:16

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