Good Booms, Bad Booms

Guillermo Ordonez and Gary Gorton
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Gary Gorton: Yale School of Management

No 292, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: Credit booms usually precede financial crises. However, some credit booms end in a crisis (bad booms) and others do not (good booms). We document that, while all booms start with an increase in the growth of Total Factor Productivity (TFP) and Labor Productivity (LP), such growth falls much faster subsequently for bad booms. We then develop a simple framework to explain this. Firms finance investment opportunities with short-term collateralized debt. If agents do not produce information about the collateral quality, a credit boom develops, accommodating firms with lower quality projects and increasing the incentives of lenders to acquire information about the collateral, eventually triggering a crisis. When the average quality of investment opportunities also grow, the credit boom may not end in a crisis because the gradual adoption of low quality projects is not strong enough to induce information about collateral.

Date: 2015
New Economics Papers: this item is included in nep-ppm
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Good Booms, Bad Booms (2020)
Working Paper: Good Booms, Bad Booms (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed015:292

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