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Collateral Crises

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  • Gary B. Gorton
  • Guillermo Ordonez

Abstract

Short-term collateralized debt, such as demand deposits and money market instruments - private money, is efficient if agents are willing to lend without producing costly information about the collateral backing the debt. When the economy relies on such informationally-insensitive debt, firms with low quality collateral can borrow, generating a credit boom and an increase in output and consumption. Financial fragility builds up over time as information about counterparties decays. A crisis occurs when a small shock then causes a large change in the information environment. Agents suddenly have incentives to produce information, asymmetric information becomes a threat and there is a decline in output and consumption. A social planner would produce more information than private agents, but would not always want to eliminate fragility.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17771.

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Date of creation: Jan 2012
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Handle: RePEc:nbr:nberwo:17771

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  1. Bianchi, Javier, 2009. "Overborrowing and Systemic Externalities in the Business Cycle," MPRA Paper, University Library of Munich, Germany 15114, University Library of Munich, Germany.
  2. Roger D. Lagunoff & Stacey L. Schreft, 1999. "Financial fragility with rational and irrational exuberance," Research Working Paper, Federal Reserve Bank of Kansas City 99-01, Federal Reserve Bank of Kansas City.
  3. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises," IMF Working Papers, International Monetary Fund 08/224, International Monetary Fund.
  4. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(3), pages 401-19, June.
  5. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, Princeton University Press, edition 1, volume 1, number 8973.
  6. Ordoñez, Guillermo L., 2013. "Fragility of reputation and clustering of risk-taking," Theoretical Economics, Econometric Society, Econometric Society, vol. 8(3), September.
  7. Enrique G. Mendoza & Marco E. Terrones, 2008. "An Anatomy Of Credit Booms: Evidence From Macro Aggregates And Micro Data," NBER Working Papers, National Bureau of Economic Research, Inc 14049, National Bureau of Economic Research, Inc.
  8. Reinhart, Carmen & Rogoff, Kenneth, 2009. "Banking Crises: An Equal Opportunity Menace," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7131, C.E.P.R. Discussion Papers.
  9. David Andolfatto, 2011. "Undue Diligence," 2011 Meeting Papers, Society for Economic Dynamics 994, Society for Economic Dynamics.
  10. Goetzmann, William N. & Ibbotson, Roger G. & Peng, Liang, 2001. "A new historical database for the NYSE 1815 to 1925: Performance and predictability," Journal of Financial Markets, Elsevier, Elsevier, vol. 4(1), pages 1-32, January.
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Cited by:
  1. Helios Herrera & Guillermo Ordoñez & Christoph Trebesch, 2014. "Political Booms, Financial Crises," PIER Working Paper Archive, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania 14-024, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  2. Manmohan Singh & Peter Stella, 2012. "Money and Collateral," IMF Working Papers, International Monetary Fund 12/95, International Monetary Fund.
  3. Fabrizio Perri & Vincenzo Quadrini, 2011. "International Recessions," IMES Discussion Paper Series, Institute for Monetary and Economic Studies, Bank of Japan 11-E-26, Institute for Monetary and Economic Studies, Bank of Japan.
  4. Itay Goldstein & Assaf Razin, 2013. "Three Branches of Theories of Financial Crises," NBER Working Papers, National Bureau of Economic Research, Inc 18670, National Bureau of Economic Research, Inc.
  5. Farhi, Emmanuel & Tirole, Jean, 2012. "Liquid Bundles," TSE Working Papers, Toulouse School of Economics (TSE) 12-328, Toulouse School of Economics (TSE), revised Oct 2013.
  6. repec:fip:fedreq:y:2011:i:3q:p:209-254:n:vol.97no.3 is not listed on IDEAS
  7. Pablo Kurlat & Laura Veldkamp, 2012. "Should We Regulate Financial Information," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 12-15, New York University, Leonard N. Stern School of Business, Department of Economics.
  8. Toni Ahnert & Ali Kakhbod, 2014. "Information, Amplification and Financial Crisis," Working Papers, Bank of Canada 14-30, Bank of Canada.

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