Managing Risk Taking with Interest Rate Policy and Macroprudential Regulations

26 Pages Posted: 27 Feb 2019

See all articles by Simona Cociuba

Simona Cociuba

University of Western Ontario

Malik Shukayev

University of Alberta

Alexander Ueberfeldt

Government of Canada - Bank of Canada

Date Written: April 2019

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 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 Classification: E44, E52, G11, G18

Suggested Citation

Cociuba, Simona and Shukayev, Malik and Ueberfeldt, Alexander, Managing Risk Taking with Interest Rate Policy and Macroprudential Regulations (April 2019). Economic Inquiry, Vol. 57, Issue 2, pp. 1056-1081, 2019, Available at SSRN: https://ssrn.com/abstract=3342662 or http://dx.doi.org/10.1111/ecin.12754

Simona Cociuba (Contact Author)

University of Western Ontario

Malik Shukayev

University of Alberta

Alexander Ueberfeldt

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, K1A 0G9
Canada

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
0
Abstract Views
170
PlumX Metrics