This paper, authored by Claudio Borio and Haibin Zhu, explores the interaction between capital regulation, the business cycle, and the transmission mechanism of monetary policy. The authors argue that the link between monetary policy and the perception and pricing of risk by economic agents, often referred to as the "risk-taking channel," has received insufficient attention in the literature. They develop the concept of the risk-taking channel, compare it with current views of the transmission mechanism, and analyze its interaction with liquidity and monetary policy reaction functions. The paper highlights that changes in the financial system and prudential regulation may have increased the importance of the risk-taking channel, which is not well captured by prevailing macroeconomic paradigms and models. The authors suggest that this channel could have a significant impact on the strength of monetary policy transmission, potentially acting as a "multiplier" effect. They also discuss the implications of accounting practices and the endogeneity of liquidity in shaping the transmission mechanism. The paper concludes by emphasizing the need for further research to better understand these processes.This paper, authored by Claudio Borio and Haibin Zhu, explores the interaction between capital regulation, the business cycle, and the transmission mechanism of monetary policy. The authors argue that the link between monetary policy and the perception and pricing of risk by economic agents, often referred to as the "risk-taking channel," has received insufficient attention in the literature. They develop the concept of the risk-taking channel, compare it with current views of the transmission mechanism, and analyze its interaction with liquidity and monetary policy reaction functions. The paper highlights that changes in the financial system and prudential regulation may have increased the importance of the risk-taking channel, which is not well captured by prevailing macroeconomic paradigms and models. The authors suggest that this channel could have a significant impact on the strength of monetary policy transmission, potentially acting as a "multiplier" effect. They also discuss the implications of accounting practices and the endogeneity of liquidity in shaping the transmission mechanism. The paper concludes by emphasizing the need for further research to better understand these processes.