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Good Booms, Bad Booms

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  • Gary Gorton
  • Guillermo Ordoñez

Abstract

Credit booms are not rare, some end in a crisis (bad booms) whereas others do not (good booms). We document that credit booms start with an increase in productivity growth, which subsequently falls faster during bad booms. We develop a model in which a crisis happens when a credit boom transits toward an information regime with careful examination of collateral. As this examination is more valuable when collateral backs projects with low productivity, crises are more likely during booms that display larger productivity declines. We test the main predictions of the model and identify the default probability as the main component of measured productivity that lies behind crises.

Suggested Citation

  • Gary Gorton & Guillermo Ordoñez, 2020. "Good Booms, Bad Booms," Journal of the European Economic Association, European Economic Association, vol. 18(2), pages 618-665.
    • Handle: RePEc:oup:jeurec:v:18:y:2020:i:2:p:618-665.
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    File URL: http://hdl.handle.net/10.1093/jeea/jvy058
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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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