the long run, this can cause problems. this was what i meant earlier when i said that monetary policy may in some circumstances have unexpected effects. although the central bank is acting in an apparently natural manner, in accordance with an inflation targeting policy, it may unintentionally contribute to a future crisis. the risk - taking channel can thus be said to form a link between monetary policy and financial stability. … that consists of different sub - channels the risk - taking channel actually consists of several sub - channels. one channel is that low interest rates can create incentives for investors to seek higher risk investments with a higher expected rate of return – what is known as a “ search for yield ”. this could involve, for instance, abandoning government bonds in favour of more risky, but higher - yield commercial paper during periods when the interest rate is particularly low. one reason may be the hope of attaining the same nominal yield as in earlier periods with higher interest rates. another, more indirect channel is linked to low interest rates contributing to raising, for instance, the value of assets and collateral, as well as income and profits. this can in turn affect the banks ’ assessments of, and tolerance to, risk. 4 low interest rates could mean, for paul krugman and robin wells, “ the slump goes on : why? ” the new york review of books, september 2010. see, for instance, john b. taylor, “ the financial crisis and the policy responses : an empirical analysis of what went wrong ”, nber working paper series no. 14631, 2009. the concept of a “ risk - taking channel ” was introduced by claudio borio and haibin zhu in “ capital regulation, risk - taking and monetary policy : a missing link in the transmission mechanism? ” bis working papers no 268, 2008. this paper also reviews the different mechanisms the risk - taking channel consists of. the banks ’ assessment of risk can in turn affect the size of the leverage they allow. variations in leverage also affect the price of the asset and are an important driving force in what are known as the “ leverage cycle ” ; see instance, that they make a more optimistic assessment of the expected default frequency. this channel can be said to function as a form of multiplier in the sense that it reinforces the effects of interest rate changes on the economy. finally, the central bank ’ s communication can also contribute to increasing risk taking. this may occur, for instance, if the participants in the

lever ” i mentioned initially that monetary policy may receive support from, but can sometimes be counteracted by, measures primarily aimed at maintaining financial stability. regulation and supervision can support monetary policy in two ways. for one thing, one can try to design a regulatory framework that remains the same over time, but nevertheless prevents creditdriven bubbles from arising. but one can also use regulation more actively so that there is not just an “ interest rate lever ” but also a “ regulation lever ” to pull on. normally, one may imagine pulling on the two levers for different reasons – the interest rate lever for monetary policy reasons and the regulation lever to maintain financial stability. but the levers are nevertheless connected in different ways. when one pulls on one lever, the resulting effects are often similar to those one gets if one pulls on the other. for instance, a regulation change, such as a higher amortisation requirement on mortgages, will lead to higher payments for households in the same way as an interest rate increase does. regardless of which lever you pull, it is difficult to ensure the effects are only of a monetary policy nature, or only aimed at financial stability. one of the lessons of the financial crisis is that there are close links between these two policy areas, and that one therefore needs to coordinate how one pulls on the levers. 12 having said this, it may be worth adding that monetary policy and a policy for financial stability usually go hand in hand, more or less automatically. moreover, problems with financial stability only arise under certain limited periods. on the other hand, one may claim that the crisis and its effects show that we actually should worry about it slightly more often than we have done. if we are successful in formulating and using regulations and supervision, the central bank can receive assistance with both of the monetary policy problems i mentioned earlier. the central bank can hold the policy rate low when the economic outlook calls for this, without being afraid of risks building up through a monetary policy risk - taking channel. and if regulation and supervision can be used to prevent credit - driven bubbles arising, the central bank need not fear a balance sheet recession where monetary policy has little effect. regulation with monetary policy motives with regard to coordinating the interest rate lever and the regulation level, i would like to return to a question i raised when i talked about balance sheet recessions. as i noted then, a fall on the property market could lead to a weak performance in the economy if households become uncertain about