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Author Boz, Emine, author

Title Financial innovation, the discovery of risk, and the U.S. credit crisis / prepared by Emine Boz and Enrique G. Mendoza
Published [Washington, D.C.] : International Monetary Fund, [2010]
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Description 1 online resource (48 pages) : illustrations
Series IMF working paper ; WP/10/164
IMF working paper ; WP/10/164
Contents Cover Page; Title Page; Copyright Page; Contents; I. Introduction; 1. Net Credit Market Assets and Value of Residential Land; 2. Timeline of Events During the Run-up to the U.S. Credit Crisis; 3. Banks' Willingness To Lend; II. A Model of Financial Innovation with Learning; A. Agents' Optimization Problem; B. General Features of the Learning Setup; C. Learning and the Sequence of Beliefs; 4. Evolution of Beliefs; D. Recursive Competitive Equilibrium; III. Quantitative Analysis; A. Baseline Calibration; 1. Parameters; 5. Beta Distributions; 6. Evolution of Beliefs under Alternative Priors
B. Quantitative Findings1. Ergodic distributions; 7. Ergodic Distributions of Bond Holdings; 2. Forecast functions; 8. Forecast Functions; 9. Interest Rate Premium; 3. Turning Points; 2. Average Changes at the Turning Points; 4. Excess Returns on Land; 10. Excess Returns; 5. Sensitivity Analysis; 3. Sensitivity; IV. Conclusion; A. Solution Method; B. Computation of Ergodic Distributions, Forecast Functions and Excess Returns; References; Footnotes
Summary 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
Bibliography Includes bibliographical references
Notes Print version record
Subject Credit -- United States.
Financial crises -- United States.
United States -- Economic conditions -- 21st century.
United States -- Economic policy.
Form Electronic book
Author Mendoza, Enrique G., 1963- author
IMF Institute, issuing body
International Monetary Fund, issuing body
ISBN 1282846361
Other Titles Financial innovation, the discovery of risk, and the United States credit crisis