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Monetary policy, risk taking, and pricing: evidence from a quasi-natural experiment

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<mark>Journal publication date</mark>2015
<mark>Journal</mark>Review of Finance
Issue number1
Volume19
Number of pages50
Pages (from-to)95-144
Publication statusPublished
Early online date9/09/14
Original languageEnglish

Abstract

We study the risk-taking channel of monetary policy in Bolivia, a dollarized country where monetary changes are transmitted exogenously from the USA. We find that a lower policy rate spurs the granting of riskier loans, to borrowers with worse credit histories, lower ex-ante internal ratings, and weaker ex-post performance (acutely so when the rate subsequently increases). Effects are stronger for small firms borrowing from multiple banks. To uniquely identify risk-taking, we assess collateral coverage, expected returns, and risk premia of the newly granted riskier loans, finding that their returns and premia are actually lower, especially at banks suffering from agency problems.