Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/171938 
Year of Publication: 
2016
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2016-47
Publisher: 
Bank of Canada, Ottawa
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 both 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 system regulation and policies
Monetary policy framework
JEL: 
E44
E52
G11
G18
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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