Gary B. Gorton
Yale School of Management; National Bureau of Economic Research (NBER)
Guillermo L. Ordoñez
University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)
March 15, 2013
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 counter-parties 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.
Number of Pages in PDF File: 52
Keywords: Financial Crises, Financial Fragility, Short-term debt, Credit Booms
JEL Classification: E3, E32, E5working papers series
Date posted: January 14, 2012 ; Last revised: March 18, 2013
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