Monetary Policy and Excessive Bank Risk Taking

European Banking Center Discussion Paper No. 2010-06S

CentER Discussion Paper Series No. 2010-30S

27 Pages Posted: 18 Mar 2010

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2010


If monetary policy is to aim at financial stability, how would it change? To analyze this question, this paper develops a general-form, axiomatic framework. Financial stability objectives are shown to make a monetary authority more conservative and more aggressive. Conservative as it sets higher rates on average. And aggressive because, in reaction to negative shocks, cuts are deeper but shorter-lived than otherwise. Keeping cuts short is crucial as bank risk responds primarily to stable low rates. Within the short span, cuts then must be deep to achieve standard objectives.

Keywords: Monetary policy, Financial stability

JEL Classification: E52, G01, G21

Suggested Citation

Agur, Itai and Demertzis, Maria, Monetary Policy and Excessive Bank Risk Taking (March 1, 2010). European Banking Center Discussion Paper No. 2010-06S. Available at SSRN: or

Itai Agur (Contact Author)

IMF ( email )

700 19th Street NW
Washington, DC 20431
United States


Maria Demertzis

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium, 1210

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