Stephen Cecchetti, Mr. Tommaso Mancini Griffoli, and Mr. Machiko Narita
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.
As a result of the Asian crisis, methods of coping with volatile international capital markets have received considerable attention from observers and policymakers. It has been argued that the imposition by Chile of a nonremunerated reserve requirement on external borrowing played a useful role in the smooth liberalization of its capital account by allowing Chile to deal effectively with short-term capital inflows and thus to reduce its vulnerability to external shocks, and that such measures should be adopted by other countries. In light of this, this paper reviews Chile’s experience in managing capital flows and draws lessons for policymakers.