Market distress can be the catalyst of a deleveraging wave, as in the 2007/08 financial crisis. This paper demonstrates how market distress and deleveraging can fuel each other in the presence of adverse selection problems in asset markets. At the core of the detrimental feedback loop is agents'...

We develop a model in which a financial intermediary's investment in risky assets - risk taking - is excessive due to limited liability and deposit insurance, and characterize the policy tools that implement efficient risk taking. In the calibrated model, coordinating interest rate policy with...

We provide a theoretical foundation for the claim that prolonged periods of easy monetary conditions increase bank risk taking. The net effect of a monetary policy change on bank monitoring (an inverse measure of risk taking) depends on the balance of three forces: interest rate pass-through,...