Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/175492 
Year of Publication: 
2016
Series/Report no.: 
Research Report No. 2016-6
Publisher: 
The University of Western Ontario, Department of Economics, London (Ontario)
Abstract: 
We develop a model in which a financial intermediary's investment in risky assets - risk taking - is excessive due to limited liability and deposit insurance, and characterize the policy tools that implement efficient risk taking. In the calibrated model, coordinating interest rate policy with state-contingent macroprudential regulations - either capital or leverage regulation, and a tax on profits - achieves efficiency. Interest rate policy mitigates excessive risk taking, by altering the return and the supply of collateralizable safe assets. In contrast to commonly-used capital regulation, leverage regulation has stronger effects on risk taking and calls for higher interest rates.
Subjects: 
Financial intermediation
risk taking
interest rate policy
macroprudential regulations
capital requirements
leverage ratio
JEL: 
E44
E52
G11
G18
Document Type: 
Working Paper

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