IDEAS home Printed from https://ideas.repec.org/p/hal/wpaper/halshs-00439245.html
   My bibliography  Save this paper

Leveraged financing, over investment, and boom-bust cycles

Author

Listed:
  • Patrick-Antoine Pintus

    () (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université - EHESS - École des hautes études en sciences sociales)

  • Yi Weng

    () (Federal Reserve Bank of St. Louis - Federal Reserve Bank of St. Louis, Tsinghua University [Beijing])

Abstract

It has long been argued in the history of economic thought that over investment through highly leveraged borrowing under elastic credit supply may generate large boom-bust business cycles. This paper rationalizes this idea in a dynamic general equilibrium model with infinitely lived rational agents. It shows that dynamic interactions between strong asset-accumulation motives (based on habit formation on the borrower side) and elastic credit supply (based on collateralized lending on the lender side) generate a multiplier-accelerator mechanism that can transform a one-time technological innovation into large and long-lasting boom-bust cycles. Such cycles share many features in common to investment bubbles observed in the history (such as the IT bubble in the 1990s and the 2000s housing bubble).

Suggested Citation

  • Patrick-Antoine Pintus & Yi Weng, 2009. "Leveraged financing, over investment, and boom-bust cycles," Working Papers halshs-00439245, HAL.
  • Handle: RePEc:hal:wpaper:halshs-00439245
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00439245
    as

    Download full text from publisher

    File URL: https://halshs.archives-ouvertes.fr/halshs-00439245/document
    Download Restriction: no

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pengfei Wang & Yi Wen, 2012. "Speculative Bubbles and Financial Crises," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(3), pages 184-221, July.

    More about this item

    Keywords

    Over-Investment; Borrowing Constraints; Multiplier-Accelerator; Elastic Credit Supply;

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:wpaper:halshs-00439245. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.