Working Paper: NBER ID: w18942
Authors: Valentina Bruno; Hyun Song Shin
Abstract: 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.
Keywords: capital flows; risk-taking; monetary policy; bank leverage
JEL Codes: E5; F32; F33; F34; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fed funds target rate (E52) | bank leverage (G21) |
| fed funds target rate (E52) | risk-taking behavior in banks (G21) |
| bank leverage (G21) | US dollar exchange rate (F31) |
| VIX index (G12) | bank leverage (G21) |
| contractionary shock to US monetary policy (E65) | cross-border capital flows (F32) |