We present an equilibrium model of financial institutions to examine the optimal regulation of risk taking. Shareholders set compensation incentivizing management to increase risk to excessive levels. Regulators use caps on asset risk and compensation to achieve the socially optimal risk level....

We propose and implement a method that provides quantitative estimates of the extent to which higher-than-expected infl ation can lower the real value of outstand- ing government debt. Looking forward, we derive a formula for the debt burden that relies on detailed information about debt...

This paper investigates the effects of financial institutions issuing contingent capital, a debt security that automatically converts into equity if assets fall below a predetermined threshold. We decompose bank liabilities into sets of barrier options and present closed-form solutions for their...

We propose and implement a method that provides quantitative estimates of the extent to which higher-than-expected inflation can lower the real value of outstanding government debt. Looking forward, we derive a formula for the debt burden that relies on detailed information about debt maturity...

Inflation targeting -- the central bank practice of attempting to keep inflation levels within fixed bounds around a quantitative target -- has been adopted by more than twenty economies. Such practice has an important impact on the stochastic nature of inflation and, consequently, on the...

We propose and implement a method that provides quantitative estimates of the extent to which higher- than-expected inflation can lower the real value of outstanding government debt. Looking forward, we derive a formula for the debt burden that relies on detailed information about debt maturity...

This paper investigates the e¤ects of ?nancial institutions issuing contingent capital, a debt security that automatically converts into equity if assets fall below a predetermined threshold. We decompose bank liabilities into sets of barrier op- tions and present closed-form solutions for...