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MANAGING RISK TAKING WITH INTEREST RATE POLICY AND MACROPRUDENTIAL REGULATIONS
Author(s) -
Cociuba Simona E.,
Shukayev Malik,
Ueberfeldt Alexander
Publication year - 2019
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/ecin.12754
Subject(s) - leverage (statistics) , economics , interest rate , monetary economics , capital requirement , macroprudential regulation , systemic risk , macroeconomics , microeconomics , financial crisis , incentive , machine learning , computer science
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 policies that implement efficient risk taking. In the calibrated model, combining 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. ( JEL E44, E52, G11, G18)