Leveraged Borrowing and Boom-Bust Cycles

Patrick Pintus and Yi Wen

Review of Economic Dynamics, 2013, vol. 16, issue 4, 617-633

Abstract: Investment booms and asset "bubbles" are often the consequence of heavily leveraged borrowing and speculations of persistent growth in asset demand. We show theoretically that dynamic interactions between elastic credit supply (due to leveraged borrowing) and persistent credit demand (due to consumption habit) can generate a multiplier-accelerator mechanism that transforms a one-time productivity or financial shock into large and long-lasting boom-bust cycles. The predictions are consistent with the basic features of investment booms and the consequent asset-market crashes led by excessive credit expansion. (Copyright: Elsevier)

Keywords: Asset bubble; Investment boom; Borrowing constraints; Multiplier-accelerator; Elastic credit supply; Habit formation (search for similar items in EconPapers)
JEL-codes: E21 E22 E32 E44 E63 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (22)

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Related works:
Working Paper: Leveraged Borrowing and Boom-Bust Cycles (2013)
Working Paper: Leveraged borrowing and boom-bust cycles (2010)
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DOI: 10.1016/j.red.2012.09.006

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