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Leveraged financing, over investment, and boom-bust cycles

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  • Patrick-Antoine Pintus

    () (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579)

  • Yi Weng

    () (Federal Reserve Bank of St. Louis - Federal Reserve Bank of St. Louis, Tsinghua University - Tsinghua University)

Abstract

It has long been argued in the history of economic thought that over investment through highly leveraged borrowing under elastic credit supply may generate large boom-bust business cycles. This paper rationalizes this idea in a dynamic general equilibrium model with infinitely lived rational agents. It shows that dynamic interactions between strong asset-accumulation motives (based on habit formation on the borrower side) and elastic credit supply (based on collateralized lending on the lender side) generate a multiplier-accelerator mechanism that can transform a one-time technological innovation into large and long-lasting boom-bust cycles. Such cycles share many features in common to investment bubbles observed in the history (such as the IT bubble in the 1990s and the 2000s housing bubble).

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Bibliographic Info

Paper provided by HAL in its series Working Papers with number halshs-00439245.

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Date of creation: 2009
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Handle: RePEc:hal:wpaper:halshs-00439245

Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00439245/en/
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Related research

Keywords: Over-Investment; Borrowing Constraints; Multiplier-Accelerator; Elastic Credit Supply;

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