Regulating the Financial Cycle: An Integrated Approach with a Leverage Ratio

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Abstract

We propose a regulatory approach for restricting debt financing as an amplification mechanism across the financial system. A stylised model illustrates the trade-off between static and time-varying limits on leverage in dampening the financial cycle. Whereas the traditional view on regulation focuses on equity capital as a buffer against exogenous risks, our approach focuses instead on debt financing and endogenous feedback mechanisms.
Original languageEnglish
Pages (from-to)70-72
Number of pages3
JournalEconomics Letters
Volume136
DOIs
Publication statusPublished - 2015

Research programs

  • RSM F&A

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