Toothless tiger with claws? Financial stability communication, expectations, and risk-taking

Abstract

Central bank communication about financial stability causally affects individuals’ beliefs and risk-taking behavior, consistent with an expectations channel of financial stability communication. Individuals receiving a warning from the central bank in a randomized information experiment expect a higher probability of a financial crisis and reduce their demand for risky assets. This reduction is driven by downward revisions in individuals’ expected Sharpe ratios due to lower expected returns and higher perceived downside risks. In addition, these individuals deposit a smaller fraction of their savings at riskier banks.