Arbeitspapier
Do low interest rates sow the seeds of financial crises?
A view advanced in the aftermath of the late-2000s financial crisis is that lower than optimal interest rates lead to excessive risk taking by financial intermediaries. We evaluate this view in a quantitative dynamic model in which interest rate policy affects risk taking by changing the amount of safe bonds that intermediaries use as collateral in the repo market. In this model with properly-priced collateral, lower than optimal interest rates reduce risk taking. We also consider the possibility that intermediaries can augment their collateral by issuing assets whose risk is underestimated by credit rating agencies, as was observed prior to the crisis. In the presence of such mispriced collateral, lower than optimal interest rates contribute to excessive risk taking and amplify the severity of recessions.
- Language
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Englisch
- Bibliographic citation
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Series: Bank of Canada Working Paper ; No. 2011-31
- Classification
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Wirtschaft
Financial Markets and the Macroeconomy
Monetary Policy
Financial Institutions and Services: Government Policy and Regulation
General Equilibrium and Disequilibrium: Financial Markets
- Subject
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Financial system regulation and policies
Transmission of monetary policy
- Event
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Geistige Schöpfung
- (who)
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Cociuba, Simona E.
Shukayev, Malik
Ueberfeldt, Alexander
- Event
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Veröffentlichung
- (who)
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Bank of Canada
- (where)
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Ottawa
- (when)
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2011
- DOI
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doi:10.34989/swp-2011-31
- Handle
- Last update
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10.03.2025, 11:42 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Cociuba, Simona E.
- Shukayev, Malik
- Ueberfeldt, Alexander
- Bank of Canada
Time of origin
- 2011
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