Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/230483
Authors: 
Kato, Ryo
Tsuruga, Takayuki
Year of Publication: 
2020
Series/Report no.: 
ISER Discussion Paper No. 1078
Abstract: 
Pecuniary externalities in models with financial friction justify macroprudential policies for preventing economic agents'excessive risk taking. We extend the Diamond and Rajan (2012) model of banks with the production factors and explore how a pe- cuniary externality affects a bank's leverage. We show that the laissez-faire banks in our model take on excessive risks compared with the constrained social optimum. Our numerical simulations suggest that the crisis probability is 2-3 percentage points higher in the laissez-faire economy than in the constrained social optimum.
Subjects: 
Financial crisis
Liquidity shortage
Maturity mismatch
Credit externalities
Financial regulation
JEL: 
E3
G01
G21
Document Type: 
Working Paper

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