Explaining the Financial and Economic Crises
Edited by Eckhard Hein, Daniel Detzer and Nina Dodig
Chapter 9: The role of incentives for the Great Recession: securitization and contagion
Most causes and consequences of the financial crisis and the subsequent Great Recession may be investigated from the point of view of incentives. We apply this point of view exclusively to securitization and contagion. Our analysis, however, is not restricted to the role of incentives, but surveys and discusses different aspects of the process of securitization, and of the related financial contagion between countries and economic units, that may be relevant for understanding the Great Recession. The reason to connect the literature on contagion with that on securitization in this chapter is because there is a wide consensus on the observation that the process of securitization has deeply modified the process of propagation of financial distress, although there are different ideas on its determinants and implications. Financial and real contagion can be sparked by fundamental factors affecting price co-movements. Although these propagation mechanisms could be considered normal interconnections, rather than contagion processes in the strict sense of the term, these factors can be triggered by either global or local shocks.
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