Capital Flows and the Risk-Taking Channel of Monetary Policy
43 Pages Posted: 12 Apr 2013 Last revised: 10 May 2014
Date Written: March 14, 2013
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: Suggested Citation