Amsterdam PhD Finance Seminars

Robin Döttling (University of Amsterdam)
Wednesday, 9 September 2015

Low interest rates encourage risk taking because they reduce the opportunity cost of capital requirements, decreasing skin in the game (opportunity cost effect). At the zero lower bound deposit rates are constrained from below and interest margins of banks shrink, further encouraging risk-taking (interest margin effect). When margins become too small preventing risk-shifting through capital requirements can become so costly that banks stop lending altogether, compromising the creation of private money. This creates a welfare loss as savers have to resort to fiat money as savings vehicle.

Discussant: Wenqiang Huang (VU University Amsterdam)