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Abstract

In this dissertation, I conduct a macroeconomic welfare analysis of securitization in a real business cycle with a banking sector. I model securitization as an optional interbank funding channel that credibly reduces the diversion ability on borrowed funds and increases operation costs on loan assets. In effect, securitization allows banks to increase the asset size while sacrificing the rate of return per unit of assets. Building on the mechanism of inefficient credit booms followed by a banking sector breakdown suggested by Boissay, Collard and Smets (2016), I demonstrate that the availability of securitization increases the resilience against banking sector breakdowns and increases the size of credit booms associated with a breakdown. As a result, the economy experiences less frequent financial recessions but once a financial recession occurs, it is likely to be more severe. In the presence of the savings glut externality where households do not internalize the effects of their savings behavior on credit booms and banking sector breakdowns, the financial innovation of increasing the profitability of securitization can make the social trade-off from securitization negative. This is because an abuse of securitization provides too much funding to the banking sector, causing an over-investment in production. Therefore, under highly developed securitization technology with minimal extra costs, regulation may be needed to balance the gains from the increased resilience against banking sector breakdowns and the losses from the exacerbated savings glut externality. In a calibrated version of the model, I illustrate that an optimal regulation on the incentives of securitization can make the availability of securitization socially beneficial.

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