Financial Innovation, the Discovery of Risk, and the U.S. Credit Crisis

WPIEA2010164 Image
Price:  $18.00

Author/Editor: Enrique G Mendoza, Emine Boz
Release Date: © July, 2010
ISBN : 978-1-45520-175-4
Stock #: WPIEA2010164
Stock Status: On back-order

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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.

More publications in this series: Working Papers

More publications by: Enrique G Mendoza ; Emine Boz