Good Booms, Bad Booms

58 Pages Posted: 22 Feb 2016  

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)

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Date Written: February 2016

Abstract

Credit booms are not rare and usually precede financial crises. However, some end in a crisis (bad booms) while others do not (good booms). We document that credit booms start with an increase in productivity, which subsequently falls much faster during bad booms. We develop a model in which crises happen when credit markets change to an information regime with careful examination of collateral. As this examination is more valuable when collateral backs projects with low productivity, crises become more likely during booms that display large productivity declines. As productivity decays over a boom as an endogenous result of more economic activity, a crisis may be the result of an exhausted boom and not necessarily of a negative productivity shock. We test the main predictions of the model and identify the component of productivity behind crises.

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Suggested Citation

Gorton, Gary B. and Ordoñez, Guillermo L., Good Booms, Bad Booms (February 2016). NBER Working Paper No. w22008. Available at SSRN: https://ssrn.com/abstract=2736084

Gary B. Gorton (Contact Author)

Yale School of Management ( email )

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HOME PAGE: http://mba.yale.edu/faculty/profiles/gorton.shtml

National Bureau of Economic Research (NBER)

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Guillermo L. Ordoñez

University of Pennsylvania - Department of Economics ( email )

160 McNeil Building
3718 Locust Walk
Philadelphia, PA 19104
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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