Prudential Policy with Distorted Beliefs / Eduardo Dávila, Ansgar Walther.

Format:

Book

Author/Creator:

Dávila, Eduardo.

Contributor:

National Bureau of Economic Research.

Walther, Ansgar.

Series:

Working Paper Series (National Bureau of Economic Research) no. w28879.

NBER working paper series no. w28879

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2021.

Summary:

This paper studies leverage regulation and monetary policy when equity investors and/or creditors have distorted beliefs relative to a planner. We characterize how the optimal leverage regulation responds to arbitrary changes in investors' and creditors' beliefs and relate our results to practical scenarios. We show that the optimal regulation depends on the type and magnitude of such changes. Optimism by investors calls for looser leverage regulation, while optimism by creditors, or jointly by both investors and creditors, calls for tighter leverage regulation. Monetary policy should be tightened (loosened) in response to either investors' or creditors' optimism (pessimism).

Notes:

Print version record

June 2021.