Fed paper models risk-taking channel of monetary policy
Model in which monetary expansion increases risk-taking appears to fit with the data
Economists have designed a mechanism reflecting the risk-taking channel of monetary policy and show it can replicate some features of the data in a working paper, published by the Federal Reserve.
Elena Afanasyeva and Jochen Güntner outline a partial equilibrium model in which a monopolistic bank finds it more profitable to lend against a given amount of borrower collateral following a monetary expansion. They go on to embed the mechanism into a dynamic stochastic general equilibrium model.
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