Collateral Crises

Gary Gorton and Guillermo Ordonez

No 17771, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Short-term collateralized debt, such as demand deposits and money market instruments - private money, is efficient if agents are willing to lend without producing costly information about the collateral backing the debt. When the economy relies on such informationally-insensitive debt, firms with low quality collateral can borrow, generating a credit boom and an increase in output and consumption. Financial fragility builds up over time as information about counterparties decays. A crisis occurs when a small shock then causes a large change in the information environment. Agents suddenly have incentives to produce information, asymmetric information becomes a threat and there is a decline in output and consumption. A social planner would produce more information than private agents, but would not always want to eliminate fragility.

JEL-codes: E2 E20 E32 E44 G01 G2 G20 (search for similar items in EconPapers)
Date: 2012-01
New Economics Papers: this item is included in nep-cba, nep-cta and nep-mac
Note: AP CF ME
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Citations: View citations in EconPapers (13)

Published as Gary Gorton & Guillermo Ordo?ez, 2014. "Collateral Crises," American Economic Review, American Economic Association, vol. 104(2), pages 343-78, February.

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Related works:
Journal Article: Collateral Crises (2014)
Working Paper: Collateral Crises (2011)
Working Paper: Collateral Crises (2011)
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