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Capital Flows and the Risk-taking channel of monetary policy

Capital Flows and the Risk-taking channel of monetary policy. V. Bruno & H. Shin (Comments on). Main contribution. Borio & Zhu (2012) on the risk-taking channel :

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Capital Flows and the Risk-taking channel of monetary policy

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  1. Capital Flows and the Risk-taking channel of monetary policy V. Bruno & H. Shin (Comments on)

  2. Main contribution Borio & Zhu (2012) on the risk-taking channel : The analysis is very much of a speculative, exploratory nature. We do not develop any new specific model or present new econometric evidence, but simply highlight what appear to us as under-researched aspects of the issues. Capital Flows and Risk-taking channel

  3. Main Contribution Show empirically the impact of the (r)FFR to risk taking behavior of banks (in foreign countries) Capital Flows and Risk-taking channel

  4. Some issues – VAR estimation Why using a real federal fund rate ? Our empirical investigation consists of recursive vector autoregressions (VAR) examining the dynamic relationship between the CBOE VIX index of implied volatility on the S&P index options, the real Feds Funds target rate of the US Federal Reserve, and a proxy for the leverage of global banks. The real Fed Funds target rate is computed for the end of the quarter as the target Fed Funds rate minus the CPI inflation rate.” Capital Flows and Risk-taking channel

  5. Some issues – prudential controls Macro prudential policies discarded (capital/liquidity requirements, leverage cap,…) Capital Flows and Risk-taking channel

  6. Discussion The Foreign central bank has incentive to keep its interest rate low(er than it would have been) • Reduces incentive to borrow abroad • Prevent exchange rate appreciation Capital Flows and Risk-taking channel

  7. interest rate spillover Source: Taylor (2013, link) Capital Flows and Risk-taking channel

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