Capital Flows and the Risk-taking channel of monetary policy

V. Bruno & H. Shin

(Comments on)

Capital Flows and Risk-taking channel 2

Main contribution

Monday, May 12th

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 ContributionShow empirically the impact of the (r)FFR to risk taking behavior of banks (in foreign countries)

Monday, May 12th

Capital Flows and Risk-taking channel 4

Some issues – VAR estimation

Why using a real federal fund rate ?

Monday, May 12th

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,…)

Monday, May 12th

Capital Flows and Risk-taking channel 7

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

Monday, May 12th

Capital Flows and Risk-taking channel 8

interest rate spillover

Monday, May 12th

Source: Taylor (2013, link)