DP12677 Risk-Taking Channel of Monetary Policy
|Author(s):||Tobias Adrian, Arturo Estrella, Hyun Song Shin|
|Publication Date:||February 2018|
|Keyword(s):||risk taking channel of monetary policy|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=12677|
One of the most robust stylized facts in macroeconomics is the forecasting power of the term spread for future real activity. We propose a possible causal mechanism for the forecasting power of the term spread, deriving from the balance sheet management of financial intermediaries and the risk-taking channel of monetary policy. Monetary tightening leads to the flattening of the term spread, reducing net interest margin and credit supply. We provide empirical support for the risk-taking channel.