Optimal monetary policy with the risk-taking channel

Arbeitspapier

Empirical research suggests that lower interest rates induce banks to take higher risks. We assess analytically what this risk-taking channel implies for optimal monetary policy in a tractable New Keynesian model. We show that this channel creates a motive for the planner to stabilize the real rate. This objective conflicts with the standard inflation stabilization objective. Optimal policy thus tolerates more inflation volatility. An inertial Taylor-type reaction function becomes optimal. We then quantify the significance of the risk-taking channel for monetary policy in an estimated medium-scale extension of the model. Ignoring the channel when designing policy entails non-negligible welfare costs (0.7% lifetime consumption equivalent).

Angaben zum Objekt

• ISBN: 978-92-899-5514-0
• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: ECB Working Paper ; No. 2772

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Financial Markets and the Macroeconomy ; Monetary Policy
• Thema: Risk-taking channel ; Optimal monetary policy ; Inertial policy rate

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Abbate, Angela ; Thaler, Dominik
• Ereignis: Veröffentlichung
• (wer): European Central Bank (ECB)
• (wo): Frankfurt a. M.
• (wann): 2023

Weitere Informationen

• DOI: doi:10.2866/3899
• Handle: http://hdl.handle.net/10419/278343
• Letzte Aktualisierung: 10.03.2025, 11:45 MEZ