Toothless Tiger With Claws? Financial Stability Communication, Expectations, and Risk-taking

62 Pages Posted: 17 Mar 2021 Last revised: 19 Mar 2021

See all articles by Johannes Beutel

Johannes Beutel

Deutsche Bundesbank

Norbert Metiu

Deutsche Bundesbank

Valentin Stockerl

Deutsche Bundesbank

Multiple version iconThere are 2 versions of this paper

Date Written: January 15, 2021

Abstract

We study the effects of central bank communication about financial stability on individuals’ expectations and risk-taking. Using a randomized information experiment, we show that communication causally affects individuals’ beliefs and investment behavior, consistent with an expectations channel of financial stability communication. Individuals receiving a warning from the central bank expect a higher probability of a financial crisis and reduce their demand for risky assets. This reduction is driven by downward revisions in individuals’ expected Sharpe ratios due to lower expected returns and higher perceived downside risks. In addition, these individuals deposit a smaller fraction of their savings at riskier banks.

Keywords: central bank communication; financial stability; stock market expectations; randomized information experiment

JEL Classification: C11, D12, D83, D91, E58, G11

Suggested Citation

Beutel, Johannes and Metiu, Norbert and Stockerl, Valentin, Toothless Tiger With Claws? Financial Stability Communication, Expectations, and Risk-taking (January 15, 2021). Journal of Monetary Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3766847 or http://dx.doi.org/10.2139/ssrn.3766847

Johannes Beutel (Contact Author)

Deutsche Bundesbank ( email )

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

Norbert Metiu

Deutsche Bundesbank ( email )

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

Valentin Stockerl

Deutsche Bundesbank ( email )

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

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