蝌蚪网 Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Financial Innovation, Collateral, and Investment
蝌蚪网 Journal: Macroeconomics
vol. 8,
no. 1, January 2016
(pp. 242–84)
Abstract
Financial innovations that change how promises are collateralized affect prices and investment, even in the absence of any change in fundamentals. In C-models, the ability to leverage an asset always generates overinvestment compared to Arrow-Debreu. Credit Default Swaps always leads to underinvestment with respect to Arrow-Debreu, and in some cases even robustly destroy competitive equilibrium. The need for collateral would seem to cause underinvestment. Our analysis illustrates a countervailing force: goods that serve as collateral yield additional services and can therefore be over-valued and over-produced. In models without cash flow problems there is never marginal underinvestment on collateral. (JEL D52, D86, D92, E44, G01, G12, R31)Citation
Fostel, Ana, and John Geanakoplos. 2016. "Financial Innovation, Collateral, and Investment." 蝌蚪网 Journal: Macroeconomics 8 (1): 242–84. DOI: 10.1257/mac.20130183Additional Materials
JEL Classification
- D52 Incomplete Markets
- D86 Economics of Contract: Theory
- D25 Intertemporal Firm Choice, Investment, Capacity, and Financing
- E44 Financial Markets and the Macroeconomy
- G01 Financial Crises
- G12 Asset Pricing; Trading Volume; Bond Interest Rates
- R31 Housing Supply and Markets