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Leveraged borrowing and boom-bust cycles

  • Patrick A. Pintus
  • Yi Wen

Investment booms and asset "bubbles" are often the consequence of heavily leveraged borrowing and speculations of persistent growth in asset demand. We show theoretically that dynamic interactions between leveraged borrowing and persistent asset demand can generate a multiplier-accelerator mechanism that transforms a one-time technological innovation into large and long-lasting boom-bust cycles. The predictions are consistent with the basic features of investment booms and the consequent asset-market crashes led by excessive credit expansion.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2010-027.

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Date of creation: 2010
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Handle: RePEc:fip:fedlwp:2010-027
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