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
JEL(s):
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.