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Financial Innovation, the Discovery of Risk, and the U.S. Credit Crisis (Boz E., Mendoza E. G.)Financial Crises Household Strategies
| Abstract |
Uncertainty about the riskiness of new financial products was an important factor behind the U.S. credit crisis. We show that a boom-bust cycle in debt, asset prices and consumption characterizes the equilibrium dynamics of a model with a collateral constraint in which agents learn "by observation" the true riskiness of a new financial environment. Early realizations of states with high ability to leverage assets into debt turn agents optimistic about the persistence of a high-leverage regime. The model accounts for 69 percent of the household debt buildup and 53 percent of the rise in housing prices during 1997-2006, predicting a collapse in 2007. |
| External link |
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| Libref/ |
Boz E., Mendoza E. G. (2010) "Financial Innovation, the Discovery of Risk, and the U.S. Credit Crisis", IMF Working Paper No. 10/164, pp. 1 - 63 |
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