Capital Flows and the Risk-taking channel of monetary policy

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Capital Flows and the Risk-taking channel of monetary policy V. Bruno & H. Shin (Comments on)

Capital Flows and Risk-taking channel Main contribution Borio & Zhu (2012) on the risk-taking channel : The analysis is very much of a speculative, exploratory nature. We do not develop any new specific model or present new econometric evidence, but simply highlight what appear to us as under-researched aspects of the issues. Monday, May 12th Capital Flows and Risk-taking channel

Capital Flows and Risk-taking channel Main Contribution Show empirically the impact of the (r)FFR to risk taking behavior of banks (in foreign countries) Monday, May 12th Capital Flows and Risk-taking channel

Some issues – VAR estimation Why using a real federal fund rate ? Our empirical investigation consists of recursive vector autoregressions (VAR) examining the dynamic relationship between the CBOE VIX index of implied volatility on the S&P index options, the real Feds Funds target rate of the US Federal Reserve, and a proxy for the leverage of global banks. The real Fed Funds target rate is computed for the end of the quarter as the target Fed Funds rate minus the CPI inflation rate.” Monday, May 12th Capital Flows and Risk-taking channel

Some issues – prudential controls Macro prudential policies discarded (capital/liquidity requirements, leverage cap,…) Monday, May 12th Capital Flows and Risk-taking channel

Capital Flows and Risk-taking channel Some issues Borio and Zhu (2012): “To be sure, our point is not, and cannot be, that the risk-taking channel is the most important channel of monetary policy; far from it.” Monday, May 12th Capital Flows and Risk-taking channel

Capital Flows and Risk-taking channel Discussion The Foreign central bank has incentive to keep its interest rate low(er than it would have been) Reduces incentive to borrow abroad Prevent exchange rate appreciation Monday, May 12th Capital Flows and Risk-taking channel

interest rate spillover Source: Taylor (2013, link) Monday, May 12th Capital Flows and Risk-taking channel