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Leveraged Borrowing and Boom-Bust Cycles

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  • Patrick Pintus

    (Aix-Marseille University)

  • Yi Wen

    (Federal Reserve Bank of St. Louis)

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)

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File URL: http://dx.doi.org/10.1016/j.red.2012.09.006
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 16 (2013)
Issue (Month): 4 (October)
Pages: 617-633

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Handle: RePEc:red:issued:10-168

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Keywords: Asset bubble; Investment boom; Borrowing constraints; Multiplier-accelerator; Elastic credit supply; Habit formation;

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Cited by:
  1. Patrick A. Pintus & Jacek Suda, 2013. "Learning Financial Shocks and the Great Recession," AMSE Working Papers 1333, Aix-Marseille School of Economics, Marseille, France, revised 05 Jun 2013.
  2. Pengfei Wang & Yi Wen, 2013. "Financial development and long-run volatility trends," Working Papers, Federal Reserve Bank of St. Louis 2013-003, Federal Reserve Bank of St. Louis.

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