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This dissertation comprises of three papers that explore the theme of financial instability and political economy of regulation. The first chapter studies how in the presence of moral hazard faced by banks, balance sheet opacity may induce mistakes by other market participants and consequently amplify a credit boom. The second chapter examines the role of voter preferences in shaping regulation aimed at curbing over-borrowing and alleviating future busts. The third chapter analyses how the structure of competition between interest groups affects politician’s choice of the form of political governance and its consequences for policy.