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Pills or puts?
Shuo Xia
Financial Times, February 2, 2024
This paper analyzes the effects of policy rates on financial intermediaries' risk-taking decisions. We consider an economy where (i) intermediaries have market power in granting loans, (ii) intermediaries monitor borrowers which lowers their probability of default, and (iii) monitoring is not observable which creates a moral hazard problem.
Presentation of Bundesbank's Financial Stability Review 2023