Capital Flows and the Risk-Taking Channel of Monetary Policy

43 Pages Posted: 12 Apr 2013 Last revised: 10 May 2014

See all articles by Valentina Bruno

Valentina Bruno

American University - Department of Finance and Real Estate

Hyun Song Shin

Bank for International Settlements (BIS)

Multiple version iconThere are 2 versions of this paper

Date Written: March 14, 2013

Abstract

This paper examines the relationship between low interests maintained by advanced economy central banks and credit booms in emerging economies. In a model with crossborder banking, low funding rates increase credit supply, but the initial shock is amplified through the risk-taking channel of monetary policy where greater risk-taking interacts with dampened measured risks that are driven by currency appreciation to create a feedback loop. In an empirical investigation using VAR analysis, we find that expectations of lower short-term rates dampen measured risks and stimulate cross-border banking sector capital flows.

Keywords: Capital flows, exchange rate appreciation, credit booms

JEL Classification: F32, F33, F34

Suggested Citation

Bruno, Valentina Giulia and Shin, Hyun Song, Capital Flows and the Risk-Taking Channel of Monetary Policy (March 14, 2013). BIS Working Paper No. 400. Available at SSRN: https://ssrn.com/abstract=2248649

Valentina Giulia Bruno (Contact Author)

American University - Department of Finance and Real Estate ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States

HOME PAGE: http://www.american.edu/kogod/faculty/bruno.cfm

Hyun Song Shin

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

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