Capital Flows and the Risk-Taking Channel of Monetary Policy
We study the dynamics linking monetary policy with bank leverage and show that adjustments in leverage act as the linchpin in the monetary transmission mechanism that works through fluctuations in risk-taking. Motivated by the evidence, we formulate a model of the "risk-taking channel" of monetary policy in the international context that rests on the feedback loop between increased leverage of global banks and capital flows amid currency appreciation for capital recipient economies.
We are grateful to Christopher Sims, John Taylor, Jean-Pierre Landau, Guillaume Plantin, Lars Svensson and Tarek Hassan for their comments on an earlier version of this paper. We also thank participants at the 2012 BIS Annual Conference, Bank of Canada Annual Research Conference, 2013 AEA meetings and presentations at the Monetary Authority of Singapore, Bank of Korea and at the Central Bank of the Republic of Turkey. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Bruno, Valentina & Shin, Hyun Song, 2015. "Capital flows and the risk-taking channel of monetary policy," Journal of Monetary Economics, Elsevier, vol. 71(C), pages 119-132. citation courtesy of