Leveraged Financing, Over Investment, and Boom-Bust Cycles
FRB of St. Louis Working Paper No. 2008-014C
31 Pages Posted: 5 Jun 2008 Last revised: 3 Dec 2009
Date Written: June 25, 2009
Abstract
It has long been argued in the history of economic thought that over investment through highly leveraged borrowing under elastic credit supply may generate large boom-bust business cycles. This paper rationalizes this idea in a dynamic general equilibrium model with infinitely lived rational agents. It shows that dynamic interactions between strong asset-accumulation motives (based on habit formation on the borrower side) and elastic credit supply (based on collateralized lending on the lender side) generate a multiplier-accelerator mechanism that can transform a one-time technological innovation into large and long-lasting boom-bust cycles. Such cycles share many features in common to investment bubbles observed in the history (such as the IT bubble in the 1990s and the 2000s housing bubble.).
Keywords: Excess Demand, Over-Investment, Borrowing Constraints, Multiplier-Accelerator, Elastic Credit Supply
JEL Classification: E21, E22, E32, E44, E63
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
On the Evolution of the Firm Size Distribution: Facts and Theory
By Luis M. B. Cabral and José Mata
-
The Information Technology Revolution and the Stock Market: Evidence
By Bart Hobijn and Boyan Jovanovic
-
Aggregate Consequences of Limited Contract Enforceability
By Thomas F. Cooley, Ramon Marimon, ...
-
Aggregate Consequences of Limited Contract Enforceability
By Thomas F. Cooley, Ramon Marimon, ...
-
Aggregate Consequences of Limited Contract Enforceability
By Thomas F. Cooley, Vincenzo Quadrini, ...
-
The it Revolution and the Stock Market
By Jeremy Greenwood and Boyan Jovanovic
-
The it Revolution and the Stock Market
By Jeremy Greenwood and Boyan Jovanovic