Abstract
The objective of the study is to understand the nature of the interaction between the financial and real sector in the wake of financial sector innovation of mortgage-backed securities and identify characteristics of financial markets responsible for making the real sector more vulnerable to crisis. The vulnerability of the real sector to crisis rises, higher the proportion of asset-backed securities. To explain the chain through which asset-backed securities make an impact on the real sector, we develop a basic theoretical structure using the multiplier effect introduced by Keynes. The analysis constitutes the development of a theoretical framework of interaction between the real and financial sectors.
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