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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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Bibliographic Info

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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  1. Lagunoff, Roger & Schreft, Stacey L, 1999. "Financial Fragility with Rational And Irrational Exuberance," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 531-60, August.
  2. William N. Goetzmann & Roger G. Ibbotson & Liang Peng, 2000. "A New Historical Database For The NYSE 1815 To 1925: Performance And Predictability," Yale School of Management Working Papers ysm154, Yale School of Management.
  3. Bianchi, Javier, 2009. "Overborrowing and Systemic Externalities in the Business Cycle," MPRA Paper 16270, University Library of Munich, Germany.
  4. Guillermo L. Ordoñez, 2009. "Fragility of reputation and clustering of risk-taking," Staff Report 431, Federal Reserve Bank of Minneapolis.
  5. David Andolfatto, 2010. "On the social cost of transparency in monetary economies," Working Papers 2010-001, Federal Reserve Bank of St. Louis.
  6. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  7. 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.
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Cited by:
  1. Fabrizio Perri & Vincenzo Quadrini, 2011. "International Recessions," NBER Working Papers 17201, National Bureau of Economic Research, Inc.
  2. Vincenzo Quadrini, 2011. "Financial frictions in macroeconomic fluctations," Economic Quarterly, Federal Reserve Bank of Richmond, issue 3Q, pages 209-254.
  3. 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.
  4. Farhi, Emmanuel & Tirole, Jean, 2012. "Information,Tranching and Liquidity," IDEI Working Papers 736, Institut d'Économie Industrielle (IDEI), Toulouse.

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