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Collateral Crises

Author

Listed:
  • 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.

Suggested Citation

  • Guillermo Ordonez & Gary Gorton, 2011. "Collateral Crises," 2011 Meeting Papers 569, Society for Economic Dynamics.
  • Handle: RePEc:red:sed011:569
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G2 - Financial Economics - - Financial Institutions and Services
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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