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The hidden soul of financial innovation: An agent-based modelling of home mortgage securitization and the finance-growth nexus
- Source :
- Economic Modelling. 68:51-73
- Publication Year :
- 2018
- Publisher :
- Elsevier BV, 2018.
-
Abstract
- This paper investigates the interaction between financial innovation and securitization. To this end, it introduces the rate of financial innovation (RoFIN) as an endogenous variable in an Agent-Based Model (ABM) set up and studies its interaction with the non-fixed fraction of securitized mortgage loans. RoFIN is able to capture financial agents’ business decisions on using financial innovation tools, processes and services, such as the home mortgage securitization process. In the aftermath of the 2007–2009 financial and economic crisis it has been argued that financial innovation and securitization have increased macro/finance systemic instability via, for example, non-linear two-way spillovers between the financial system and the macroeconomy. The ABM model proposed enables the capture of these dynamics. High values of RoFIN (i.e. exceeding the threshold of 50%) make financial innovation become harmful for the economic system, leading to a switch from a virtuous to an unvirtuous business cycle. When RoFIN reaches 90%, the numerical simulations come close to the macro/finance dynamics observed before and during the financial crisis. Given its potential role in triggering financial and economic instability, RoFIN is of interest for financial regulation and supervision. How this endogenous variable may be influenced by means of operational variables under the control of policymakers remains a subject for future research.
- Subjects :
- Finance
Economics and Econometrics
050208 finance
Financial innovation
business.industry
05 social sciences
Geography of finance
Financial system
Financial regulation
Indirect finance
0502 economics and business
Financial crisis
Economics
Financial analysis
Financial modeling
Structured finance
050207 economics
business
Subjects
Details
- ISSN :
- 02649993
- Volume :
- 68
- Database :
- OpenAIRE
- Journal :
- Economic Modelling
- Accession number :
- edsair.doi...........bb6f7d7586a5ace00f2249cbd7b8c9fe