Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/144499 
Year of Publication: 
2015
Series/Report no.: 
NBB Working Paper No. 287
Publisher: 
National Bank of Belgium, Brussels
Abstract: 
Motivated by VAR evidence on the risk-taking channel in the US, we develop a New Keynesian model where low levels of the risk-free rate induce banks to grant credit to riskier borrowers. In the model an agency problem between depositors and equity holders incentivizes banks to take excessive risk. As the real interest rate declines these incentives become stronger and risk taking increases. We estimate the model on US data using Bayesian techniques and assess optimal monetary policy conduct in the estimated model, assuming that the interest rate is the only available instrument. Our results suggest that in a risk taking channel environment, the monetary authority should seek to stabilize the path of the real interest rate, trading off more inflation volatility in exchange for less interest rate and output volatility.
Subjects: 
Bank Risk
Monetary policy
DSGE Models
JEL: 
E12
E44
E58
Document Type: 
Working Paper

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