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Managing Risk Taking with Interest Rate Policy and Macroprudential Regulations

Simona Cociuba (simona.cociuba@gmail.com), Malik Shukayev (shukayev@ualberta.ca) and Alexander Ueberfeldt

Staff Working Papers from Bank of Canada

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.

Keywords: Financial system regulation and policies; Monetary policy framework (search for similar items in EconPapers)
JEL-codes: E44 E52 G11 G18 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2016
New Economics Papers: this item is included in nep-dge, nep-mac and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: MANAGING RISK TAKING WITH INTEREST RATE POLICY AND MACROPRUDENTIAL REGULATIONS (2019) Downloads
Working Paper: Managing Risk Taking with Interest Rate Policy and Macroprudential Regulations (2016) Downloads
Working Paper: Managing Risk Taking with Interest Rate Policy and Macroprudential Regulations (2016) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:16-47

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