Asymmetric and Private Information

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

JEL codes: 
D82, E44, F41
Version Date: 
Jul 2010

Uncertainty about the riskiness of a new financial environment 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 the new environment.

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