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Collateral Crises

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  • Guillermo Ordonez

    (Yale University)

  • Gary Gorton

    (Yale University)

Abstract

Short-term, collateralized, debt is efficient if agents are willing to lend without producing costly information about the value of the collateral. When the economy relies on this informationally-insensitive debt, information is not renewed over time. If the value of collateral is mean reverting, there is a credit boom when firms with bad collateral start borrowing as the information about their collateral depreciates. The longer an economy remains in an information-insensitive regime, the smaller the fraction of collateral with information about their true value, and the larger the fraction of collateral that look similar. This creates fragility, since a small aggregate shock to collateral values is more likely to generate a large systemic collapse in output and consumption. Furthermore, if a crisis triggers information production, the economy takes longer to recover.

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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 569.

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Date of creation: 2011
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Handle: RePEc:red:sed011:569

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References

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  1. Guillermo Ordonez, 2008. "Fragility of Reputation and Clustering in Risk Taking," 2008 Meeting Papers 441, Society for Economic Dynamics.
  2. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
  3. Roger Lagunoff & Stacey L. Schreft, 1999. "Financial fragility with rational and irrational exuberance," Proceedings, Federal Reserve Bank of Cleveland, pages 531-567.
  4. Javier Bianchi, 2010. "Overborrowing and Systemic Externalities in the Business Cycle," 2010 Meeting Papers 96, Society for Economic Dynamics.
  5. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "Banking Crises: An Equal Opportunity Menace," NBER Working Papers 14587, National Bureau of Economic Research, Inc.
  6. William N. Goetzmann & ROGER G. IBBOTSON & LIANG PENG, 2004. "A New Historical Database For The NYSE 1815 To 1925: Performance And Predictability," Yale School of Management Working Papers ysm5, Yale School of Management.
  7. Enrique G. Mendoza & Marco E. Terrones, 2008. "An Anatomy Of Credit Booms: Evidence From Macro Aggregates And Micro Data," NBER Working Papers 14049, National Bureau of Economic Research, Inc.
  8. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  9. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises," IMF Working Papers 08/224, International Monetary Fund.
  10. David Andolfatto, 2010. "On the social cost of transparency in monetary economies," Working Papers 2010-001, Federal Reserve Bank of St. Louis.
  11. David Andolfatto, 2011. "Undue Diligence," 2011 Meeting Papers 994, Society for Economic Dynamics.
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Cited by:
  1. Pablo Kurlat & Laura Veldkamp, 2012. "Should We Regulate Financial Information," Working Papers 12-15, New York University, Leonard N. Stern School of Business, Department of Economics.
  2. Vincenzo Quadrini & Fabrizio Perri, 2010. "International recessions," 2010 Meeting Papers 222, Society for Economic Dynamics.
  3. Emmanuel Farhi & Jean Tirole, 2012. "Liquid Bundles," Working Paper 70971, Harvard University OpenScholar.
  4. repec:fip:fedreq:y:2011:i:3q:p:209-254:n:vol.97no.3 is not listed on IDEAS
  5. Itay Goldstein & Assaf Razin, 2013. "Three Branches of Theories of Financial Crises," NBER Working Papers 18670, National Bureau of Economic Research, Inc.
  6. Manmohan Singh & Peter Stella, 2012. "Money and Collateral," IMF Working Papers 12/95, International Monetary Fund.
  7. Guillermo Ordonez & Christoph Trebesch & Helios Herrera, 2013. "Political Booms, Financial Crises," 2013 Meeting Papers 224, Society for Economic Dynamics.

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