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The Good, the Bad, and the Missed Boom

Author

Listed:
  • Enrico Perotti
  • Magdalena Rola-Janicka

Abstract

Some credit booms result in financial crises. While excessive risk-taking could plausibly explain the boom-to-bust cycle, many investors do not anticipate increasing risk. We show that credit booms may be misunderstood as being driven by high productivity because opaque bank assets disguise risk incentives. Balanced funding relative to productive prospects can sustain prudent lending (good boom), whereas funding imbalances may induce high risk exposure and boost asset prices (bad boom) or lead to asset underpricing and insufficient lending (missed boom). Rational agents drawing inference from prices make mistakes that can amplify the effect of funding imbalances and propagate risk.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Enrico Perotti & Magdalena Rola-Janicka, 2022. "The Good, the Bad, and the Missed Boom," The Review of Financial Studies, Society for Financial Studies, vol. 35(11), pages 5025-5056.
    • Handle: RePEc:oup:rfinst:v:35:y:2022:i:11:p:5025-5056.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhac014
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    References listed on IDEAS

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    2. Döttling, Robin, 2023. "Bank Capital Regulation in a Zero Interest Environment," OSF Preprints 9dxzf, Center for Open Science.

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    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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