Leverage and the Central Banker's Put
نویسنده
چکیده
The paper describes a mechanism by which private leverage choices exhibit strategic complementarities through the reaction of monetary policy. The key ingredient is that monetary policy is non-targeted. The ex-post bene ts from a monetary bailout accrue in proportion to the aggregate amount of leverage, while the distortion costs are to a large extent xed. This insight has important consequences. First, private interest-rate exposure is highly sensitive to macroeconomic conditions. Second, private borrowers may deliberately choose to increase their interest-rate sensitivity following bad news about future needs for liquidity. Third, optimal monetary policy is time inconsistent. Fourth, macro-prudential supervision is called for.
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