Low interest rates lead to excessive risk-taking, impacting societal welfare.
Low interest rates lead financial institutions to take on more risky investments. A model was created to see if this risk-taking is too high. The model shows that low interest rates make risky assets more appealing and reduce safe borrowing options. The model suggests that at optimal policy, there is too much risk-taking. However, when interest rates are low, borrowing constraints tighten, and risk-taking stays at a socially acceptable level.