Summary / Abstract
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We develop a model in which a financial intermediarys 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 pro ts 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. |