The Good, the Bad and the Missed Boom

75 Pages Posted: 22 Aug 2019 Last revised: 1 Jul 2021

See all articles by Enrico C. Perotti

Enrico C. Perotti

University of Amsterdam - Finance Group; Centre for Economic Policy Research (CEPR)

Magdalena Rola-janicka

Tilburg University

Date Written: June 28, 2019

Abstract

Some credit booms result in financial crises. While excessive risk taking is a plausible cause, many investors do not anticipate increasing risk. We show that credit booms may be misunderstood as productivity-driven, due to opaque bank assets which disguise risk incentives. Balanced funding relative to productive prospects can sustain prudent lending (good boom), while funding imbalances may induce high risk exposure and boost asset prices (bad boom), or lead to asset under-pricing and insufficient lending (missed boom). Rational agents drawing inference from prices make mistakes that can amplify the effect of funding imbalances and propagate risk.

Suggested Citation

Perotti, Enrico C. and Rola-janicka, Magdalena, The Good, the Bad and the Missed Boom (June 28, 2019). Available at SSRN: https://ssrn.com/abstract=3439972 or http://dx.doi.org/10.2139/ssrn.3439972

Enrico C. Perotti (Contact Author)

University of Amsterdam - Finance Group ( email )

Plantage Muidergracht 12
Amsterdam, 1018 TV
Netherlands
+31 20 525 4159 (Phone)
+31 20 525 5285 (Fax)

HOME PAGE: http://www.fee.uva.nl/fm/people/pero.htm

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Magdalena Rola-janicka

Tilburg University ( email )

P.O. Box 90153
Tilburg, Noord-Brabant 5000 LE
Netherlands

HOME PAGE: http://https://www.magdarolajanicka.com/

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