Does Prolonged Monetary Policy Easing Increase Financial Vulnerability?

Using firm-level data for approximately 1,000 bank and nonbank financial institutions in 22 countries over the past 15 years we study the impact of prolonged monetary policy easing on risk-taking behavior. We find that the leverage ratio, as well as other measures of firm-level vulnerability, increases for banks and nonbanks as domestic monetary policy easing persists. Cross-border effects are also notable. We find effects of roughly similar magnitude on foreign financial sector firms when the U.S. eases policy. Results appear robust to a variety of specifications, and to be non-linear, with risk-taking behavior rising most quickly at the onset of monetary policy easing.
Publication date: March 2017
ISBN: 9781475588644
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nonbank financial institutions , prolonged monetary policy easing , financial vulnerability , risk-taking behavior , Financial Markets and the Macroeconomy , Monetary Policy (Targets , Instruments , and Effects) , Monetary Policy (Targets Instruments and Effects)

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