One can briefly say that the first area concerns monetary policy sometimes having unexpected effects, the second concerns it having much less effect than normal and the third concerns monetary policy receiving support from, but sometimes possibly also being counteracted by, measures that are primarily aimed at maintaining financial stability. I will run through these areas one by one and explain in more detail what I mean. But first I would like to clarify something. The fact that I am raising these issues should not be interpreted as my trying to make a point about how the world looks with certainty. Although some of the ideas are in line with my own reasoning in the monetary policy discussion, others are relevant from a more general perspective. These are simply issues I think are of current interest and which I believe will be discussed in the coming period. BIS Review 164/2010  1  Can expansionary monetary policy increase risk taking in the economy? A central component in the financial crisis was what has sometimes been called a North Atlantic property bubble. 1 In the United States and a number of other countries, such as Ireland, Spain and the United Kingdom, property prices had increased substantially over a number of years, accompanied by a large expansion in credit. Property prices then fell drastically in the crisis. There is no individual explanation for this development – it is due to a number of interacting factors.
There is as yet rather limited empirical research on the risk-taking channel, but some papers on the subject have now begun to appear. The studies are based on data from the eurozone and the United States, as well as other countries. They appear on the whole to support the theory that low policy rates lead to the banks taking greater risks. 5 Well worth more research… My personal view is that the risk-taking channel is definitely an interesting line, well worth further research. Our knowledge of the monetary policy transmission mechanisms is far from complete and the way that monetary policy affects the banks’ risk taking is something we need to learn more about. I also believe it would be useful to broaden the question and try to find out if low interest rates for a long period of time can lead to an increase in risk propensity in society as a whole – among households, companies and other participants in the economy – and not just among banks. So far, research in this field has been even scarcer. 6 As I see it, an increased risk propensity among households could be an equally strong driving force behind a rise in property prices as greater risk taking by the banks. …but not so easy to do in practice It is of course difficult to predict today what the conclusions eventually will be and what implications they may have for monetary policy.