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SUMMARY:Prudential Policy with Distorted Beliefs
DTSTART:20210326T103000
DTEND:20210326T120000
DTSTAMP:20260407T051406Z
UID:d5e91eadea70bf4b7131f04f1697852a1fed2d568feabcfa71fb3e66
CATEGORIES:Conferences - Seminars
DESCRIPTION:Ansgar WALTHER\, Imperial College London\; Centre for Economic
  Policy Research (CEPR)\nThis paper studies financial and monetary policy 
 in environments in which equity investors and creditors may have distorted
  beliefs. We characterize conditions under which it is optimal to tighten 
 or relax leverage caps in response to arbitrary changes in beliefs. The op
 timal policy response to belief distortions depends on the type as well as
  the extent of exuberance\, and it is not generally true that regulators s
 hould lean against the wind by tightening leverage caps in response to opt
 imism. We show that increased optimism by investors is associated with rel
 axing the optimal leverage cap\, while increased optimism by creditors\, o
 r jointly by both investors and creditors is associated with a tighter opt
 imal leverage cap. In the presence of government bailouts\, increased opti
 mism by equity investors may call for a tighter optimal leverage cap too\,
  depending on whether equity optimism is concentrated on upside or downsid
 e risk. Increased optimism by either equity investors or creditors is asso
 ciated with higher incentives to raise interest rates\, so monetary tighte
 ning can act as a useful substitute for financial regulation.\n 
LOCATION:Zoom
STATUS:CONFIRMED
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