Leveraged financing, over investment, and boom-bust cycles

Patrick Pintus and Yi Weng
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Yi Weng: Federal Reserve Bank of St. Louis - Federal Reserve Bank of St. Louis, THU - Tsinghua University [Beijing]
Authors registered in the RePEc Author Service: Yi Wen

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Abstract: It has long been argued in the history of economic thought that over investment through highly leveraged borrowing under elastic credit supply may generate large boom-bust business cycles. This paper rationalizes this idea in a dynamic general equilibrium model with infinitely lived rational agents. It shows that dynamic interactions between strong asset-accumulation motives (based on habit formation on the borrower side) and elastic credit supply (based on collateralized lending on the lender side) generate a multiplier-accelerator mechanism that can transform a one-time technological innovation into large and long-lasting boom-bust cycles. Such cycles share many features in common to investment bubbles observed in the history (such as the IT bubble in the 1990s and the 2000s housing bubble).

Keywords: Over-Investment; Borrowing Constraints; Multiplier-Accelerator; Elastic Credit Supply (search for similar items in EconPapers)
Date: 2009
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00439245
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