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Leverage Cycles and the Anxious Economy

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  • John Geanakoplos
  • Ana Fostel

Abstract

We provide a pricing theory for emerging asset classes, like emerging markets, that are not yet mature enough to be attractive to the general public. We show how leverage cycles can cause contagion, flight to collateral, and issuance rationing in a frequently recurring phase we call the anxious economy. Our model provides an explanation for the volatile access of emerging economies to international financial markets, and for three stylized facts we identify in emerging markets and high yield data since the late 1990s. Our analytical framework is a general equilibrium model with heterogeneous agents, incomplete markets, and endogenous collateral, plus an extension encompassing adverse selection. (JEL D53, G12, G14, G15)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 98 (2008)
Issue (Month): 4 (September)
Pages: 1211-44

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Handle: RePEc:aea:aecrev:v:98:y:2008:i:4:p:1211-44

Note: DOI: 10.1257/aer.98.4.1211
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  1. Why are stocks dropping so fast?
    by Economic Logician in Economic Logic on 2008-10-10 16:41:00
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