Fuzzy Capital Requirements, Risk-Shifting and the Risk Taking Channel of Monetary Policy

@inproceedings{Dubecq2009FuzzyCR,
  title={Fuzzy Capital Requirements, Risk-Shifting and the Risk Taking Channel of Monetary Policy},
  author={Simon Dubecq and Beno{\^i}t Mojon and Xavier Ragot},
  year={2009}
}
We set up a model where asset price bubbles due to risk shifting can be moderated by capital requirements. However, imperfect information about the ratio of required capital, or, in the context of the sub-prime crisis, the extent of regulatory arbitrage, introduces uncertainty about the risk exposure of intermediaries. Underestimation of regulatory arbitrage may induce households to infer that higher asset prices are due to a decline of risk. First, this mechanism can explain why the risk… CONTINUE READING

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