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Collateral Crises

  • Gary B. Gorton
  • Guillermo Ordonez

Short-term collateralized debt, such as demand deposits and money market instruments - private money, is efficient if agents are willing to lend without producing costly information about the collateral backing the debt. When the economy relies on such informationally-insensitive debt, firms with low quality collateral can borrow, generating a credit boom and an increase in output and consumption. Financial fragility builds up over time as information about counterparties decays. A crisis occurs when a small shock then causes a large change in the information environment. Agents suddenly have incentives to produce information, asymmetric information becomes a threat and there is a decline in output and consumption. A social planner would produce more information than private agents, but would not always want to eliminate fragility.

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File URL: http://www.nber.org/papers/w17771.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17771.

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Date of creation: Jan 2012
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Publication status: published as Gary Gorton & Guillermo Ordo?ez, 2014. "Collateral Crises," American Economic Review, American Economic Association, vol. 104(2), pages 343-78, February.
Handle: RePEc:nbr:nberwo:17771
Note: AP CF ME
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  1. 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.
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  3. Guillermo L. Ordoñez, 2009. "Fragility of reputation and clustering of risk-taking," Staff Report 431, Federal Reserve Bank of Minneapolis.
  4. Federal Reserve Bank of St. Louis & David Andolfatto, 2010. "On the Social Cost of Transparency in Monetary Economies," 2010 Meeting Papers 980, Society for Economic Dynamics.
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  6. Javier Bianchi, 2009. "Overborrowing and systemic externalities in the business cycle," Working Paper 2009-24, Federal Reserve Bank of Atlanta.
  7. 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.
  8. Reinhart, Carmen M. & Rogoff, Kenneth S., 2013. "Banking crises: An equal opportunity menace," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4557-4573.
  9. 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.
  10. David Andolfatto, 2011. "Undue Diligence," 2011 Meeting Papers 994, Society for Economic Dynamics.
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