Question: Shadow banks typically fund their assets by issuing liabilities of shorter maturity that are close substitutes for bank deposits. The maturity mismatch between their assets

Shadow banks typically fund their assets by issuing liabilities of shorter maturity that are close substitutes for bank deposits. The maturity mismatch between their assets and liabilities creates rollover risk that can trigger fire sales and systemic disruption. Plot the outstanding level of one such liability – asset-backed commercial paper (FRED code: ABCOMP) – from the start of 2002 to the end of 2007. Based on the plot, discuss how the use of asset-backed commercial paper influenced the financial crisis of 2007-2009?

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The plot appears below From 2005 to the summer of 2007 shadow banks increasingly relied on the issua... View full answer

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