International Financial Flows and the Risk-Taking Channel

46 Pages Posted: 8 Dec 2017

Date Written: December 5, 2017

Abstract

During the 1990s, the increased propensity to save in emerging market economies triggered massive inflows towards safe assets in the United States; a few years later, rising dollar funding by global banks was concurrent to increasing inflows to private-label US securities. While it is well documented that foreign financial flows have eased financing conditions in the US through the compression of long-term yields, in this paper we also find significant effects on the credit spread and the VIX, suggesting a relevant risk appetite channel. Moreover, flows into the US corporate bond market, partly linked to the previous saving glut in emerging economies, also directly affected bank leverage, household indebtedness and the housing market. This evidence provides a new perspective on the global banking glut, complementary to the role of banks in the risk-taking channel of monetary policy.

Keywords: saving glut, banking glut, capital flows, banking leverage, risk-taking channel

JEL Classification: F32, F33, F34

Suggested Citation

Cova, Pietro and Natoli, Filippo, International Financial Flows and the Risk-Taking Channel (December 5, 2017). Bank of Italy Temi di Discussione (Working Paper) No. 1152, Available at SSRN: https://ssrn.com/abstract=3084022 or http://dx.doi.org/10.2139/ssrn.3084022

Pietro Cova

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Filippo Natoli (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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