Collateral Booms and Information Depletion

Preliminary (please do not publish or circulate)We propose a model of collateral booms, in which an increase in the value of firms enables entrepreneurs to expand their borrowing and investment.  Collateral booms lead to an... [ view full abstract ]

Preliminary (please do not publish or circulate)

We propose a model of collateral booms, in which an increase in the value of firms enables entrepreneurs to expand their borrowing and investment.  Collateral booms lead to an increase in the capital stock, but they also reduce screening thereby depleting the economy's informational capital. When the boom ends, there is a deep crisis for two reasons: first, the lack of collateral restricts borrowing and investment; second, it takes time for the economy to rebuild its informational capital, which has been depleted during the boom. We provide empirical evidence in support of our main mechanism.