This paper studies optimal financial policy in a world where the financial sector can become excessively optimistic. I … decompose the welfare effects of bank capital regulation to demonstrate the effects of exuberance and its interaction with … evidence on the relationship between bank capital and risk-taking. Finally, I investigate the sensitivity of these insights …

of financial crises, showing that money is taken out of circulation when bank loans are paid back. This key insight is at … economy that cannot generate enough demand for its own goods and services. Financial crises result when bank lending slows … down or comes to a halt – while outstanding bank loans are still due for repayment. The mechanism is discussed in detail …

the change in eligibility criteria for collateral in central bank refinancing operations. Our results show that market … observe a broad-based flight to liquidity. The European Central Bank's unconventional monetary policy had a strong impact on …