Stephen Golub, Ayse Kaya, Michael Reay, Monday, September 8, 2014 - 00:00
Bruno Biais, Jean-Charles Rochet, Paul Woolley, Thursday, August 21, 2014 - 00:00
The Global Crisis has intensified debates over the merits of financial innovation and the optimal size of the financial sector. This column presents a model in which the growth of finance is driven by the development of a financial innovation. The model can help explain the securitised mortgage debacle that triggered the latest crisis, the tech bubble in the late 1990s, and junk bonds in the 1980s. A striking implication of the model is that regulation should be toughest when finance seems most robust and when innovations are waxing strongly.