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...be viewed as financial intermediaries facing risks from maturity mismatch, and our model presents a novel distortion of monetary transmission through a bank lending channel (Kashyap and Stein, 2000; Peek and Rosengren, 2000). Benmelech and Bergman (2012) also study how the real economy becomes unresponsive to monetary stimulus through financial frictions. There is an emerging literature on the risk taking channel of monetary policy which focuses on how monetary policy affects the “quality” of lending rather than the “quantity” (for an overview, see Borio and Zhu, 2012; De Nicolò et al., 2010; Adrian and Shin, 2010). Empirical evidence relating monetary loosening and quality deterioration is documented by Jiménez et al. (2014); Ioannidou et al. (2009); Peydró and Maddaloni (2011); Paligorova and Santos (2012); Altunbas and Marques-Ibanez (2011); Dell’Ariccia et al. (2013). However, theoretical understanding of this channel is lagging behind, both in terms of 2Tenreyro and Thwaites (2015) show that monetary stimulus is less effective in recessions than in expansions and Bech et al. (2014) document that the stimulus effect is further impaired when associated with a financial crisis. 3Thus, agents in a stan...

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...erent channels have similar predictions for aggregate quantities, many empirical studies use micro-level data from banks and/or firms rather than the aggregate data (Bayoumi and Melander, 2009). One consequence of these empirical studies is that the general conditions of the banking sector and the specific characteristics of individual banks can have predictable impacts on the monetary transmission mechanism. In fact, recent studies have emphasised a risk-taking channel of monetary policy that places more emphasis on the willingness of banks to expand their balance sheet (Borio and Zhu, 2012; Adrian and Shin, 2011). The works of Adrian and Shin (2011) provide an overview of how changes in risk appetite, which is partly a function of monetary policy, generates a critical link between monetary policy changes, the actions of financial intermediaries, and the impact on the real economy. Boivin et al (2010) have argued that the monetary transmission mechanism is one of the most studied areas of monetary economics for two reasons. First, understanding how monetary policy affects the economy is essential to evaluating what the stance of monetary policy is at a particular point in time. Second, in order to deci...