In the context of interest rates "too low for too long", questions regarding the neutrality of monetary policy are arising. After the Great Recession, scholars start to investigate whether the previous situation of low level of interest rates due to the dot-com bubble had some responsibilities in the excessive risk-taking behaviour of financial intermediaries, thus in the subsequent financial turmoil (Gambacorta [2009]). Once the crash of the financial markets has propagated to real economy, both the European Central Bank and the Federal Reserve intervened with unconventional loose monetary policy: massive quantitative easing and forward guidance. Nowadays, probably the greatest and unexpected shock has hit the economy and the markets: the Covid-19 pandemic. In a situation in which we already had very low (even negative) interest rates and high level of liquidity due to the responses to the previous financial crisis, Central Banks and Governments have had to intervene with other extraordinary easing policy to support the economy. Following Swanson [2017] and Kroencke et. al [2021], I will define the risky component of the monetary policy announcements that had induce investment funds reallocation towards riskier positions searching for yield (Rajan [2005]). By exploiting the data about equity funds domiciled in the US and high frequency data on monetary policy, I will estimate the impact of the announcement on asset price subsequent to funds reallocation, on GDP and inflation via a proxy VAR and a dynamic panel VAR. I want to assess whether the risk-taking channel has dominated the traditional channel, making monetary policy neutral to real economy but effective on financial markets.
In my opinion, the literature did not reserve the attention that the risk-taking channel deserves. The progressive detachment of financial markets from real economy makes Stiglitz statement even more relevant: "the stock market is not the economy". The progressive rally of the financial markets after the Covid-19 downturn poses further attention on this point. The economy was already in a situation of high liquidity and low interest rate despite a general slackness and the new expansionary policy to sustain the economy after the Covid-19 shock, have mainly propagated to financial markets, whose growth is running faster. That is a problem of incomplete pass-through of monetary policy. Despite the expansionary monetary policy still due to the Global Financial Crisis, inflation and GDP are not following sustained growth, giving born to theory as the Secular Stagnation (Summers [2014]). However, the recent development of inflation dynamics due to bottlenecks and supply shocks bring to my attention the problem of incomplete pass-through and neutrality of monetary policy in the long-run when already in liquidity trap. The excess of liquidity in the system remains in the financial markets and it is reallocated via investment funds towards riskier position, sustaining market growth. This view about the risk-taking channel is innovative in literature. Furthermore, once demonstrated the dominance of this kind of channel over the traditional, two further extensions are possible. On one side, a great challenge would be the design of a theoretical model able to capture the problem of incomplete pass-through and the flows of liquidity from Central Banks to financial markets with few spill over to real economy. On the other side, the responsibilities of capital requirements combined with liquidity injections in the banking system might be assessed. In fact, banks can borrow liquidity at negative interest rate and use it to build up capital buffers as well as deposit it to investment and monetary funds searching for yields that are no more available via the traditional business profile.