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Managing Risk Taking with Interest Rate Policy and Macroprudential Regulations

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  • Simona Cociuba
  • Malik Shukayev
  • Alexander Ueberfeldt

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.

Suggested Citation

  • Simona Cociuba & Malik Shukayev & Alexander Ueberfeldt, 2016. "Managing Risk Taking with Interest Rate Policy and Macroprudential Regulations," Staff Working Papers 16-47, Bank of Canada.
  • Handle: RePEc:bca:bocawp:16-47
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    Cited by:

    1. Matthieu Darracq Paries & Jenny Korner & Niki Papadopoulou, 2019. "Empowering Central Bank Asset Purchases: The Role of Financial Policies," Working Papers 2019-1, Central Bank of Cyprus.
    2. Cociuba, Simona E. & Shukayev, Malik & Ueberfeldt, Alexander, 2016. "Collateralized borrowing and risk taking at low interest rates," European Economic Review, Elsevier, vol. 85(C), pages 62-83.
    3. Denis Gorea & Oleksiy Kryvtsov & Tamon Takamura, 2016. "Leaning Within a Flexible Inflation-Targeting Framework: Review of Costs and Benefits," Discussion Papers 16-17, Bank of Canada.

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    More about this item

    Keywords

    Financial system regulation and policies; Monetary policy framework;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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