Coordinating the “interest rate lever” and the “regulation lever” I mentioned initially that monetary policy may receive support from, but can sometimes be counteracted by, measures primarily aimed at maintaining financial stability. Regulation and supervision can support monetary policy in two ways. For one thing, one can try to design a regulatory framework that remains the same over time, but nevertheless prevents creditdriven bubbles from arising. But one can also use regulation more actively so that there is not just an “interest rate lever” but also a “regulation lever” to pull on. Normally, one may imagine pulling on the two levers for different reasons – the interest rate lever for monetary policy reasons and the regulation lever to maintain financial stability. But the levers are nevertheless connected in different ways. When one pulls on one lever, the resulting effects are often similar to those one gets if one pulls on the other. For instance, a regulation change, such as a higher amortisation requirement on mortgages, will lead to higher payments for households in the same way as an interest rate increase does. Regardless of which lever you pull, it is difficult to ensure the effects are only of a monetary policy nature, or only aimed at financial stability. One of the lessons of the financial crisis is that there are close links between these two policy areas, and that one therefore needs to coordinate how one pulls on the levers.
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.