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Pré-Publication, Document De Travail Année : 2009

Leveraged financing, over investment, and boom-bust cycles

Résumé

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).
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Dates et versions

halshs-00439245 , version 1 (07-12-2009)

Identifiants

  • HAL Id : halshs-00439245 , version 1

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Patrick-Antoine Pintus, Yi Weng. Leveraged financing, over investment, and boom-bust cycles. 2009. ⟨halshs-00439245⟩
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