Leveraged financing, over investment, and boom-bust cycles
AbstractIt 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 InfoPaper provided by HAL in its series Working Papers with number halshs-00439245.
Date of creation: 2009
Date of revision:
Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00439245/en/
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Over-Investment; Borrowing Constraints; Multiplier-Accelerator; Elastic Credit Supply;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-12-11 (All new papers)
- NEP-BEC-2009-12-11 (Business Economics)
- NEP-DGE-2009-12-11 (Dynamic General Equilibrium)
- NEP-MAC-2009-12-11 (Macroeconomics)
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