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...

A popular narrative amongst European policymakers is that Eurozone members facing problems in the bond market are paying the price for past budgetary excess. Fiscal consolidation in these countries is seen as the principal remedy for the crisis. It is clear however that Ireland's problems derive...