Good Booms, Bad Booms

Gorton, Gary; Ordóñez, Guillermo

doi:10.3386/w22008

Cited by 70 publications

(49 citation statements)

References 76 publications

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“…As shown below, such a pattern typically occurs around various crises. This evidence is also confirmed by Gorton and Ordoñez (2016), who show that credit booms that end in a crisis are associated with lower productivity growth.…”

Section: Introductionsupporting

confidence: 71%

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Historical Patterns of Inequality and Productivity around Financial Crises

Paul¹

2020

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To understand the determinants of financial crises, previous research focused on developments closely related to financial markets. In contrast, this paper considers changes originating in the real economy as drivers of financial instability. To this end, I assemble a novel data set of long-run measures of income inequality, productivity, and other macrofinancial indicators for advanced economies. I find that rising top income inequality and low productivity growth are robust predictors of crises, and their slowmoving trend components largely explain these relations. Moreover, recessions that are preceded by such developments are deeper than recessions without such ex-ante trends.

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Section: Introductionsupporting

confidence: 71%

“…of positive shocks (e.g., Boissay, Collard, and Smets, 2016;Gorton and Ordoñez, 2016;Paul, 2017). 2 However, the typical trigger of a crisis in these models is again an adverse shock.…”

Section: Introductionmentioning

confidence: 99%

Historical Patterns of Inequality and Productivity around Financial Crises

Paul¹

2020

ERWP

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“…These papers consider the broader implications of euro-area convergence for macroeconomic outcomes, including analyzing different factors influencing the relationship between interest rates and net capital flows. 25 On the effects of financial exuberance or credit booms on productivity see also Gorton and Ordonez (2015), Cechetti and Kharroubi (2015), and Borio et al (2015).…”

Section: Increasing Capital Misallocation In Peripheral Europementioning

confidence: 99%

“…A recent strand of literature (e.g., Reis, 2013, Gopinath et al, 2015, and Gorton-Ordonez, 2015 argues that low real interest rates and abundant credit led to misallocation and weak productivity growth. For example, in Reis's (2013) model, capital inflows into a country that has inefficient financial intermediation not only reduces real interest rates but induces a shift towards lower quality entrepreneurs.…”

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confidence: 99%

The Pre-Great Recession Slowdown in Productivity

Cette¹,

Fernald²,

Mojon³

2015

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In the years since the Great Recession, many observers have highlighted the slow pace of productivity growth around the world. For the United States and Europe, we highlight that this slow pace began prior to the Great Recession. The timing thus suggests that it is important to consider factors other than just the deep crisis itself or policy changes since the crisis. For the United States, at the frontier of knowledge, there was a burst of innovation and reallocation related to the production and use of information technology in the second half of the 1990s and the early 2000s. That burst ran its course prior to the Great Recession. Continental European economies were falling back relative to that frontier at varying rates since the mid-1990s. We provide VAR and panel-data evidence that changes in real interest rates have influenced productivity dynamics in this period. In particular, the sharp decline in real interest rates that took place in Italy and Spain seem to have triggered unfavorable resource reallocations that were large enough to reduce the level of total factor productivity, consistent with recent theories and firm-level evidence.Keywords: Productivity Growth; Great Recession; Misallocation; Convergence JEL Codes: D24, E23, E44, F45, O47Please address correspondence to fernaldjg@gmail.com. We thank Fabio Canova, Robert Inklaar, Robert Kolmann, Eric Leeper, Werner Roeger, and seminar participants at several institutions for helpful comments. We also thank Genevieve Denoeux, Andrew Tai and Bing Wang for helpful research assistance. John Fernald thanks the Einaudi Institute for Economics and Finance for hosting him while writing much of the paper. The views in this paper are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of San Francisco, the Banque de France, or anyone else associated with those institutions.Since the Great Recession began in 2007, productivity growth in advanced economies has continually surprised to the downside. 1 A severe downturn and slow recovery could affect productivity through various channels, both cyclical and structural. But, as we emphasize, the slowdown in advanced-economy total factor productivity (TFP) growth was broadly underway prior to the crisis. 2 The pre-Great Recession timing suggests the importance of factors other than just the deep crisis (or ensuing policy changes) itself.To understand the evolution of advanced-economy TFP growth prior to the crisis, we highlight three broad factors that have shaped the global economy in recent decades: Technical change, structural rigidities, and declining real interest rates and abundant credit. Each factor has attracted analysis and attention but they have not, typically, been considered together. For expositional clarity as well as data availability, we focus on a small number of major advanced economies: the U.S. and the four main Euro Area countries (Germany, France, Italy, and Spain).For the United States, which we assume is at the frontier of knowledge, we highligh...

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“…However, some credit booms do end in crises, with sharp losses for the financial sector, and such episodes are associated with declines in productivity. Gorton and Ordoñez (2016) show that these patterns are present in the data. Credit booms that are followed by a financial crisis ("bad booms") are associated with lower productivity growth compared with credit booms that do not end in a crisis ("good booms").…”

Section: Introductionmentioning

confidence: 87%

A Macroeconomic Model with Occasional Financial Crises

Paul

2019

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Financial crises are born out of prolonged credit booms and depressed productivity. At times, they are initiated by relatively small shocks. Consistent with these empirical observations, this paper extends a standard macroeconomic model to include financial intermediation, long-term defaultable loans, and occasional financial crises. Within this framework, crises are typically preceded by prolonged boom periods. During such episodes, intermediaries expand their lending and leverage, thereby building up financial fragility. Crises are generally initiated by a moderate adverse shock that puts pressure on intermediaries' balance sheets, triggering a creditor run, a contraction in lending, and ultimately a deep and persistent recession.

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Good Booms, Bad Booms

Cited by 70 publications

References 76 publications

Historical Patterns of Inequality and Productivity around Financial Crises

Historical Patterns of Inequality and Productivity around Financial Crises

The Pre-Great Recession Slowdown in Productivity

A Macroeconomic Model with Occasional Financial Crises

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