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In Search for Yield? New Survey-Based Evidence on Bank Risk Taking

Claudia M. Buch

CESifo Working Paper No. 3375, 2011
published in: Journal of Economic Dynamics and Control

Abstract

There is growing consensus that the conduct of monetary policy can have an impact on financial and economic stability through the risk-taking incentives of banks. Falling interest rates might induce a “search for yield” and generate incentives to invest into risky activities. This paper provides evidence on the link between monetary policy and commercial property prices and the risk-taking incentives of banks. We use a factor-augmented vector autoregressive model (FAVAR) for the U.S. for the years 1997-2008. We include standard macroeconomic indicators and factors summarizing information provided in the Federal Reserve’s Survey of Terms of Business Lending. These data allow modeling the reactions of banks’ new lending volumes and the riskiness of new loans. We do not find evidence for a risk-taking channel for the entire banking system after a monetary policy loosening or an unexpected increase in property prices. This masks, however, important differences across banking groups. Small domestic banks increase their exposure to risk, foreign banks lower risk, and large domestic banks do not change their risk exposure.

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Inflation and Relative Price Variability in the Euro Area: Evidence from a Panel Threshold Model

Dieter Nautz, Juliane Scharff

Applied Economics, No. 4, 2012

Abstract

The impact of inflation on Relative Price Variability (RPV) generates an important channel for real effects of inflation. This article provides first evidence on the empirical relation between inflation and RPV in the euro area. Stirred by the widespread use of inflation caps or target bands in monetary policy practice, we are particularly interested in threshold effects of inflation. In line with the predictions of monetary search models, our results indicate that expected inflation significantly increases RPV only if inflation is either very low (below 0.95% per annum (p.a.)) or very high (above 4.96% p.a.).

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