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Collateral Crises

Listed author(s):
  • Guillermo Ordonez

    (Yale University)

  • Gary Gorton

    (Yale University)

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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File URL: https://economicdynamics.org/meetpapers/2011/paper_569.pdf
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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 569.

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Date of creation: 2011
Handle: RePEc:red:sed011:569
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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