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Monetary Policy and the Asset Risk‐Taking Channel
Author(s) -
ABBATE ANGELA,
THALER DOMINIK
Publication year - 2019
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12621
Subject(s) - monetary policy , economics , monetary economics , dynamic stochastic general equilibrium , interest rate , volatility (finance) , inflation (cosmology) , channel (broadcasting) , credit channel , incentive , inflation targeting , order (exchange) , financial economics , finance , microeconomics , physics , electrical engineering , theoretical physics , engineering
Abstract How important is the risk‐taking channel for monetary policy? To answer this question, we develop and estimate a quantitative monetary DSGE model where banks choose excessively risky investments, due to an agency problem that distorts banks' incentives. As the real interest rate declines, these distortions become more important and excessive risk taking increases, lowering the efficiency of investment. We show theoretically that this novel transmission channel generates a new monetary policy trade‐off between inflation and real interest rate stabilization, whereby the central bank may prefer to tolerate greater inflation volatility in order to lower excessive risk taking.