The Choice Channel of Financial Innovation

Abstract

, and participants at numerous conferences and seminars for helpful comments. Masao Fukui, Rafael C. Araujo, and Cecilie Øiulfstad provided outstanding research assistance. Simsek acknowledges support from the National Science Foundation (NSF) under Grant Number SES-1455319. Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of the NSF or the National Bureau of Economic Research. Iachan acknowledges that this study was financed in part by the Coordenação de Aperfeiçoamento de Pessoal de Nível Superior-Brasil (CAPES)-Finance Code 001. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

The Role of the Growth of Risk-Averse Wealth in the Decline of the Safe Real Interest Rate

“…Higher friction reduces the supply of safe assets and lowers the interest rate. Iachan, Nenov and Simsek (2015) consider the role of rising securitization and the decline in the real interest rate. Abel (1989) is an early contribution to the finance theory with heterogeneous preferences.…”

Pseudo-wealth and Consumption Fluctuations

“…More generally, the paper is related to a sizable literature that investigates the consequences of financial innovations and financial constraints in an environment of heterogeneous beliefs, such as Fostel and Geanakoplos (2012), Simsek (2013aSimsek ( , 2013b), among others. The closest contribution to this paper is Iachan, Nenov, and Simsek (2015) (INS henceforth). While INS focus on the effects of a financial innovation (that could be equivalent to the creation of a market for bets in this paper) on savings, we focus both on the moment of the innovation and especially on the moment in which the innovation either disappears or is no longer relevant, and analyze the effects that those moments have on consumption, betting, and savings.…”

A Risk-Centric Model of Demand Recessions and Speculation*

“…Thus, the planner e¤ectively maximizes the …rst term after substituting o and p respectively with the optimal choice of 0;s and 1 0;s . This leads to the simpli…ed problem (55) in the main text.…”

“…Adding paternalistic concerns reinforces our normative conclusions (see Section VI). More broadly, our paper is part of a large …nance literature that investigates the e¤ect of belief disagreements and speculation on …nancial markets (e.g.,Lintner (1969);Miller (1977);Varian (1989);Harris and Raviv (1993);Chen et al (2002);Fostel and Geanakoplos (2008);Simsek (2013b);Iachan et al (2015)). 4 Our paper is also related to an extensive literature on liquidity traps that has exploded since the Great Recession (see, for instance,Tobin (1975);Krugman (1998);Eggertsson and Woodford (2006); Guerrieri and Lorenzoni (2017); Hall (2011); Christiano et al (2015); Rognlie et al (2018); Midrigan et al (2016); Bacchetta et al (2016)).…”