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"In his famous 1987 monograph, Robert Lucas argued that further stabilizing the business cycles that persisted in the post-War era was pointless, because these cycles had a negligible effect on societal well- being. In particular, Lucas demonstrated that society should be willing to pay only a...
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We propose a tractable equilibrium model for pricing defaultable bonds that are subject to contagion risk. Contagion …-weight the posterior probabilities of ‘bad’ states. We estimate the model using panel data on sovereign Euro-zone CDS spreads …
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