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International financial flows and the risk-taking channel

Author

Listed:
  • Pietro Cova

    (Bank of Italy)

  • Filippo Natoli

    (Bank of Italy)

Abstract
During the 1990s, the increased propensity to save in emerging market economies triggered massive inflows towards safe assets in the United States; a few years later, rising dollar funding by global banks was concurrent to increasing inflows to private-label US securities. While it is well documented that foreign financial flows have eased financing conditions in the US through the compression of long-term yields, in this paper we also find significant effects on the credit spread and the VIX, suggesting a relevant risk appetite channel. Moreover, flows into the US corporate bond market, partly linked to the previous saving glut in emerging economies, also directly affected bank leverage, household indebtedness and the housing market. This evidence provides a new perspective on the global banking glut, complementary to the role of banks in the risk-taking channel of monetary policy.

Suggested Citation

  • Pietro Cova & Filippo Natoli, 2017. "International financial flows and the risk-taking channel," Temi di discussione (Economic working papers) 1152, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1152_17
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    References listed on IDEAS

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    1. Ines Buono & Flavia Corneli & Enrica Di Stefano, 2024. "Capital inflows to emerging countries and their sensitivity to the global financial cycle," International Finance, Wiley Blackwell, vol. 27(1), pages 17-34, April.

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    More about this item

    Keywords

    saving glut; banking glut; capital flows; banking leverage; risk-taking channel;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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