Last but not least, I will draw your attention to how monetary policy should be conducted, once we fully recognize the importance of liquidity. Here, research activity at central banks is crucial. For example, the current financial crisis sheds light on the risk-taking channel of monetary policy, stemming from the changes in liquidity conditions.
The risk-taking channel works in the nexus between monetary policy and behavior of financial institutions. 6 The prolonged low interest rates under benign financial and economic conditions tend to create over-confidence and thus boost asset prices and collateral values as well as incomes and profits, thereby leading to affecting risk perception as well as enhancing risk tolerance.