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Good Booms, Bad Booms

Author

Listed:
  • Guillermo Ordonez

    (University of Pennsylvania)

  • Gary Gorton

    (Yale School of Management)

Abstract

Credit booms usually precede financial crises. However, some credit booms end in a crisis (bad booms) and others do not (good booms). We document that, while all booms start with an increase in the growth of Total Factor Productivity (TFP) and Labor Productivity (LP), such growth falls much faster subsequently for bad booms. We then develop a simple framework to explain this. Firms finance investment opportunities with short-term collateralized debt. If agents do not produce information about the collateral quality, a credit boom develops, accommodating firms with lower quality projects and increasing the incentives of lenders to acquire information about the collateral, eventually triggering a crisis. When the average quality of investment opportunities also grow, the credit boom may not end in a crisis because the gradual adoption of low quality projects is not strong enough to induce information about collateral.

Suggested Citation

  • Guillermo Ordonez & Gary Gorton, 2015. "Good Booms, Bad Booms," 2015 Meeting Papers 292, Society for Economic Dynamics.
    • Handle: RePEc:red:sed015:292
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    More about this item

    JEL classification:

    • 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
    • G1 - Financial Economics - - General Financial Markets

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