Michele Piffer
This paper studies one possible aggregate implication of the risk-taking channel of monetary policy. Previous work finds that banks respond to a monetary expansion by taking on more risk. One possible implication of this effect is that, by the law of large numbers, aggregate defaults increase. First, I use a simple model of defaults to suggest that, in general equilibrium, risk-taking may not materialize into higher defaults. The key intuition is that a monetary expansion also increases firms' profits and households' income, an increase that exerts the opposite pressure on aggregate defaults. Second, I conduct time series analysis and document that aggregate data on delinquency rates do not support the hypothesis that defaults increase after a monetary expansion. These results suggest that aggregate delinquency rates might fail to signal the build-up of risk-taking incentives after a monetary expansion.
JEL-Classification: E52;E58
Keywords: Monetary policy, risk-taking channel, monetary shocks
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