Good Booms, Bad Booms

Gary Gorton and Guillermo Ordonez

No 22008, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Credit booms are not rare and usually precede financial crises. However, some end in a crisis (bad booms) while others do not (good booms). We document that credit booms start with an increase in productivity, which subsequently falls much faster during bad booms. We develop a model in which crises happen when credit markets change to an information regime with careful examination of collateral. As this examination is more valuable when collateral backs projects with low productivity, crises become more likely during booms that display large productivity declines. As productivity decays over a boom as an endogenous result of more economic activity, a crisis may be the result of an exhausted boom and not necessarily of a negative productivity shock. We test the main predictions of the model and identify the component of productivity behind crises.

JEL-codes: E32 E44 G01 G1 (search for similar items in EconPapers)
Date: 2016-02
New Economics Papers: this item is included in nep-dge and nep-mac
Note: AP CF EFG IFM ME
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Citations: View citations in EconPapers (51)

Published as Gary Gorton & Guillermo Ordoñez, 2020. "Good Booms, Bad Booms," Journal of the European Economic Association, vol 18(2), pages 618-665.

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Journal Article: Good Booms, Bad Booms (2020)
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