Working Paper: CEPR ID: DP13456
Authors: Ester Faia; Soeren Karau
Abstract: The risk-taking channel of monetary policy acquires relevance only if it affects systemic risk. We find robust evidence of a systemic risk-taking channel using cross-country and timeseries evidence in panel and proxy VARs for 29 G-SIBs from seven countries. We detect a significant role for pecuniary externalities by exploiting the differential impact of monetary policy shocks on book and market leverage. We rationalize these findings through a model in which a fall in interest rates induces banks to increase leverage and reduce monitoring. In an interacted VAR, we find that macroprudential policy has a significant role in taming the unintended consequences of monetary policy on systemic risk.
Keywords: risktaking channel of monetary policy; covar; LRMES; panel VAR; proxy VAR; monitoring intensity; leverage; macroprudential policy; policy complementarities
JEL Codes: E44; E52; G18; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in interest rates (E43) | Reduction in systemic risk metrics (covar, LRMES) (E44) |
| Interest rate adjustments (E43) | Impact on systemic risk (F65) |
| Macroprudential policy (E60) | Mitigation of risktaking channel of monetary policy (E52) |
| Pecuniary externalities (D62) | Differential impact on market vs book leverage (G19) |