Crises and Productivity in Good Booms and in Bad Booms
AbstractCredit booms usually precede financial crises. However, some credit booms end in a crisis (bad booms) and other booms do not (good booms). We document that, while all booms start with an increase in the growth of Total Factor Productivity (TFP), such growth falls much faster subsequently for bad booms. We then develop a simple framework to explain this. Firms finance investment opportunities with short-term collateralized debt. If agents do not produce information about the collateral quality, a credit boom develops, accommodating firms with lower quality projects and increasing the incentives of lenders to acquire information about the collateral, eventually triggering a crisis. When the quality of investment opportunities also grow, the credit boom may not end in a crisis because there is a gradual adoption of low quality projects, but those projects are also of better quality, not inducing information about collateral.
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Bibliographic InfoPaper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 14-008.
Length: 41 pages
Date of creation: 01 Feb 2014
Date of revision:
Financial Crises; Credit booms; Productivity;
Find related papers by JEL classification:
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-04-11 (All new papers)
- NEP-BAN-2014-04-11 (Banking)
- NEP-CTA-2014-04-11 (Contract Theory & Applications)
- NEP-EFF-2014-04-11 (Efficiency & Productivity)
- NEP-GER-2014-04-11 (German Papers)
- NEP-MAC-2014-04-11 (Macroeconomics)
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