Collateral Crises

Guillermo Ordonez and Gary Gorton
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Gary Gorton: Yale University

No 569, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: Short-term, collateralized, debt is efficient if agents are willing to lend without producing costly information about the value of the collateral. When the economy relies on this informationally-insensitive debt, information is not renewed over time. If the value of collateral is mean reverting, there is a credit boom when firms with bad collateral start borrowing as the information about their collateral depreciates. The longer an economy remains in an information-insensitive regime, the smaller the fraction of collateral with information about their true value, and the larger the fraction of collateral that look similar. This creates fragility, since a small aggregate shock to collateral values is more likely to generate a large systemic collapse in output and consumption. Furthermore, if a crisis triggers information production, the economy takes longer to recover.

Date: 2011
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Related works:
Journal Article: Collateral Crises (2014)
Working Paper: Collateral Crises (2012)
Working Paper: Collateral Crises (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed011:569

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