| Abstract | The phenomenon of currency appreciation tends to promote domestic credit booms and trigger the financial crisis, which is called the international risk-taking channel effect of capital flows, has been shown in recent empirical research. Based on an open economy competitive equilibrium structure, we connect the endogenous relationship between financial risk and capital flows, and separate the international risk-taking channel effect of capital flows for the theoretical exploration. We find that (1) the capital flows can boost financial systematic risk and moral hazard as well as the lending interest rates in real sector, and also increasing the intermediation’s leverage; (2) An increase in endogenous risk will make intermediation’s risk selection become more conservative which forces intermediation, along with the decreasing in asset prices and capital outflow, deleverages. And higher of the endogenous risk, more violent of the phenomenon. (3) by separating the effect of capital flows and risk-taking channel, we further find that the higher level of endogenous risk will make the risk-taking channel effect of capital flows more dramatic. However, currency appreciation will lead to capital outflow when the risk level is higher than a particular value, and which helps to accelerate the financial contraction. |