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We show how the timing of financial innovation might have contributed to the mortgage bubble and then to the crash of 2007-2009. We show why tranching and leverage first raised asset prices and why CDS lowered them afterwards. This may seem puzzling, since it implies that creating a derivative...
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We show how the timing of financial innovation might have contributed to the mortgage boom and then to the bust of 2007-2009. We study the effect of leverage, tranching, securitization and CDS on asset prices in a general equilibrium model with collateral. We show why tranching and leverage tend...
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We develop a tractable rational bubbles model with financial frictions, downward nominal wage rigidity, and the zero … leaning-against-the-bubble policy that balances the trade-off between the booms and busts of bubbles …
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