Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/171937 
Authors: 
Year of Publication: 
2016
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2016-46
Publisher: 
Bank of Canada, Ottawa
Abstract: 
Markets for securitized assets were characterized by high liquidity prior to the recent financial crisis and by a sudden market dry-up at the onset of the crisis. A general equilibrium model with heterogeneous investment opportunities and information frictions predicts that, in boom periods or mild recessions, the degree of adverse selection in resale markets for securitized assets is limited because of the reputation-based guarantees by asset originators. This supports investment and output. However, in a deep recession, characterized by high dispersion of asset qualities, there is a sudden surge in adverse selection due to an economy-wide default on reputation-based guarantees, which persistently depresses the output in the economy. Government policy of asset purchases limits the negative effects of adverse selection on the real economy, but may create a negative moral hazard problem.
Subjects: 
Business fluctuations and cycles
Economic models
Credit and credit aggregates
Financial markets
Financial stability
Financial system regulation and policies
JEL: 
E32
E5
G01
G2
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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