Monetary policy and the risk-taking channel

Before the 2007 crisis, the trade-off between output and inflation played a leading role in the discussion of monetary policy. Instead, issues relating to financial stability played a less pronounced role in shaping the stance of monetary policy and were limited to asset price dynamics. This Roundup argues that the great interest that emerged after the 2007 crisis in the effects of monetary policy on financial stability reflects the shift in attention from asset price dynamics to risk-taking incentives of financial intermediaries. The Roundup reviews the economic literature that contributed to this shift in the interpretation of the main trade-offs faced by central banks in setting interest rates.