Monetary Policy and the Asset Risk-Taking Channel

58 Pages Posted: 8 Feb 2018

See all articles by Angela Abbate

Angela Abbate

Deutsche Bundesbank

Dominik Thaler

European University Institute; Banco de España

Date Written: February 8, 2018

Abstract

How important is the risk-taking channel for monetary policy? To answer this question, we develop and estimate a quantitative monetary DSGE model where banks choose excessively risky investments, due to an agency problem which distorts banks’ incentives. As the real interest rate declines, these distortions become more important and excessive risk taking increases, lowering the efficiency of investment. We show that this novel transmission channel generates a new and quantitatively significant monetary policy trade-off between inflation and real interest rate stabilization: it is optimal for the central bank to tolerate greater inflation volatility in exchange for lower risk taking.

Keywords: Bank Risk, Monetary Policy, DSGE Models

JEL Classification: E12, E44, E58

Suggested Citation

Abbate, Angela and Thaler, Dominik, Monetary Policy and the Asset Risk-Taking Channel (February 8, 2018). Banco de Espana Working Paper No. 1805. Available at SSRN: https://ssrn.com/abstract=3120271 or http://dx.doi.org/10.2139/ssrn.3120271

Angela Abbate (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
D-60431 Frankfurt/Main, DE Germany 60316
Germany

Dominik Thaler

European University Institute ( email )

Villa Schifanoia
133 via Bocaccio
Firenze (Florence), Tuscany 50014
Italy

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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