Boom-Bust Cycles: Leveraging, Complex Securities, and Asset Prices
نویسنده
چکیده
Recent history suggests that many boom-bust cycles are naturally driven by linkages between the credit market and asset prices. Additionally, new structured securities have been developed, e.g., MBS, CDOs, and CDS, which have acted as instruments of risk transfer. We show that there is a certain non-robustness in the pricing of these instruments and we create a model in which their role in the recent nancial market meltdown, and in which the mechanism by which they exacerbate leverage cycles, is explicit. We rst discuss the extent to which complex securities can amplify boom-bust cycles. Then, we propose a model in which distinct nancial market boom-bust cycles emerge naturally. We demonstrate the interaction of leveraging and asset pricing in a dynamical model and spell out some implications for monetary policy. JEL classi cation codes: C61; C63; G21; D83; D92
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