Collateral Crises

Gary B. Gorton, Guillermo Ordonez

NBER Working Paper No. 17771
Issued in January 2012
NBER Program(s):Asset Pricing, Corporate Finance, Monetary Economics

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 counterparties 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.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w17771

Published: Gary Gorton & Guillermo Ordo?ez, 2014. "Collateral Crises," American Economic Review, American Economic Association, vol. 104(2), pages 343-78, February. citation courtesy of

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