Abstract
This thesis presents and discusses the theoretical and empirical literature that analyses the effects of monetary policy on financial stability. As a means to clarifi- cation and structure, the thesis will build on the IMF (2013) approach of separating the different effects that monetary policy may have on financial stability. These effects are divided into five different channels. In a literature review, these channels are carefully examined, and many of the most important contributions to the litera- ture are presented. In short, the borrower balance sheet channel refers to the effects that higher monetary policy rates may have on borrowing constraints and therefore possibly on default rates. The asset price channel refers to the effects that lower monetary policy rates may have on aggregate asset prices that might lead to asset price bubbles. The exchange rate channel points to the effects that monetary policy may have on capital flows and exchange rates, and therefore on foreign borrowing. The risk-shifting channel refers to the effects that higher monetary policy rates have on the liability side of banks balance sheets, possibly reducing banks margins. Fi- nally, the risk-taking channel refers to the potential effects of monetary policy on the asset side of banks balance sheets, which may affect banks risk-taking. The second part of the thesis provides an empirical analysis of a potential risk- taking channel in Norway. By making use of quarterly panel data for Norwegian banks over the period 1995 to 2014, I study the effects of an increased three-month NIBOR interest rate, as a proxy for Norwegian monetary policy, on the composition of banks risk weighted corporate lending. The results provide evidence of a risk- taking channel. Thus, the results from the analysis suggest that banks risk-taking is negatively associated with interest rates. However, since the estimated interest rate coefficient is quite small, the economic significance seems modest. I also find evidence of a less pronounced negative relationship for banks with higher capitalization levels, which is contrary to the implications suggested by the theory as well as previous empirical findings in other countries. This literature suggests that the negative relationship is less pronounced for banks with lower capitalization levels. The results from the empirical analysis may contribute to the ongoing debate on the role of monetary policy on financial stability. However, the analysis also clearly indicates a need of further investigation.