Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/265231 
Year of Publication: 
2021
Series/Report no.: 
ESRB Working Paper Series No. 130
Publisher: 
European Systemic Risk Board (ESRB), European System of Financial Supervision, Frankfurt a. M.
Abstract: 
This paper studies leverage regulation and monetary policy when equity investors and/or creditors have distorted beliefs relative to a planner. We characterize how the optimal leverage regulation responds to arbitrary changes in investors' and creditors' beliefs and relate our results to practical scenarios. We show that the optimal regulation depends on the type and magnitude of such changes. Optimism by investors calls for looser leverage regulation, while optimism by creditors, or jointly by both investors and creditors, calls for tighter leverage regulation. Monetary policy should be tightened (loosened) in response to either investors' or creditors' optimism (pessimism).
Subjects: 
prudential policy
distorted beliefs
leverage regulation
bailouts
monetary policy
JEL: 
G28
G21
E61
E52
Persistent Identifier of the first edition: 
ISBN: 
978-92-9472-237-9
Document Type: 
Working Paper

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