Working paper

State-dependent risk taking and the transmission of monetary policy shocks

Patrick Fève, Pablo Garcia, and Jean-Guillaume Sahuc

Abstract

Is risk taking an important channel by which monetary policy shocks affect economic activity? On the basis of a nonlinear structural VAR including a new measure of risk sensitivity by economic agents, we show that the role of the risk-taking channel depends on the state of the economy. While it is irrelevant during recession or normal times, it acts as an amplifier by boosting output during expansion. It means that, as long as monetary policy does not actively "lean against the wind", it may exacerbate boom-bust patterns.

Keywords

Risk-taking channel; Monetary policy; Boom-bust cycle;

JEL codes

  • C32: Time-Series Models • Dynamic Quantile Regressions • Dynamic Treatment Effect Models • Diffusion Processes
  • E52: Monetary Policy

Replaced by

Patrick Fève, Pablo Garcia, and Jean-Guillaume Sahuc, State-dependent risk taking and the transmission of monetary policy shocks, Economics Letters, vol. 164, March 2018, pp. 10–14.

Reference

Patrick Fève, Pablo Garcia, and Jean-Guillaume Sahuc, State-dependent risk taking and the transmission of monetary policy shocks, TSE Working Paper, n. 17-872, December 2017.

See also

Published in

TSE Working Paper, n. 17-872, December 2017