Working Paper: NBER ID: w31514
Authors: Kyriakos T. Chousakos; Gary B. Gorton; Guillermo Ordoñez
Abstract: The amount of information produced about firms’ productivities and about the quality of collateral backing their loans varies over time. These information dynamics determine the evolution of credit, output and productivity, which feeds back into incentives to produce information. We characterize this intricate dynamic relation. A credit boom happens when information about collateral depreciates. A financial crisis happens when information about collateral is suddenly generated. Information about firms’ individual productivities over credit booms can prevent or tame the crisis, acting as an endogenous macroprudential force.
Keywords: Information Dynamics; Credit Markets; Macroeconomic Fluctuations; Financial Crises
JEL Codes: E32; E44; G01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Information about collateral depreciating (G32) | Credit boom (F65) |
| Credit boom (F65) | Increased financing (G32) |
| Increased financing (G32) | Increase in output (E23) |
| Credit boom (F65) | Decline in average productivity (O49) |
| Generation of information about collateral (G33) | Financial crisis (G01) |
| Average productivity declines (O49) | Lenders' incentives to gather information about collateral increase (G21) |
| Lenders' incentives to gather information about collateral increase (G21) | Increased likelihood of a financial crisis (F65) |
| Increased transparency about firms' individual productivities (D20) | Prevention or mitigation of financial crises (F65) |
| Increased transparency about firms' individual productivities (D20) | Reduced lenders' incentives to investigate collateral for high-productivity firms (G21) |
| Increased transparency about firms' individual productivities (D20) | Tightening lenders' incentives to investigate collateral for low-productivity firms (G21) |