Working Paper: CEPR ID: DP12677
Authors: Tobias Adrian; Arturo Estrella; Hyun Song Shin
Abstract: One of the most robust stylized facts in macroeconomics is the forecasting power of the term spread for future real activity. We propose a possible causal mechanism for the forecasting power of the term spread, deriving from the balance sheet management of financial intermediaries and the risk-taking channel of monetary policy. Monetary tightening leads to the flattening of the term spread, reducing net interest margin and credit supply. We provide empirical support for the risk-taking channel.
Keywords: risk taking channel of monetary policy
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary tightening (E52) | flattening of term spread (E43) |
| flattening of term spread (E43) | reduction in NIM (G19) |
| reduction in NIM (G19) | decreased credit supply (E51) |
| compression of term spread (E43) | signal of reduced real activity (E44) |
| decreased credit supply (E51) | amplifying risk premiums (G19) |
| amplifying risk premiums (G19) | further reduction in real activity (E44) |