Macroeconomics and Financial Crises: Bound Together by Information Dynamics

Macroeconomics and Financial Crises reconsiders how technological change, credit booms, and endogenous information production combine to generate financial crises as inherent and recurrent reactions to macroeconomic dynamics. It identifies short-term debt, collateral, and information as common elements that are present in all financial crises, and argues that during a credit boom, information production becomes too tempting, disrupting short-term debt and cutting most firms out of the credit market.

Format: Hardback
Length: 208 pages
Publication date: 11 July 2023
Publisher: Princeton University Press

Macroeconomics and Financial Crises is a groundbreaking book that challenges the conventional understanding of financial crises as mere bad shocks, overlooking their intrinsic nature as a fundamental aspect of macroeconomic dynamics. Authored by Gary Gorton and Guillermo Ordoñez, this book offers a fresh perspective on the origins and consequences of financial crises by examining the interplay between technological change, credit booms, and endogenous information production.

One of the key insights of Macroeconomics and Financial Crises is that financial crises are not isolated events but rather result from the complex interactions between macroeconomic variables such as credit, investment, and productivity. The book argues that these variables are subject to endogenous fluctuations and that financial crises are inevitable reactions to these fluctuations.

To illustrate this point, Gorton and Ordoñez identify short-term debt, collateral, and information as common elements that are present in all financial crises. Short-term debt serves as a valuable tool for storing value over short periods, but it requires collateral backing to ensure its stability. Critically, the collateral should be such that no agent has an incentive to produce information about its quality, as this information can disrupt the short-term debt market. Debt backed by information-insensitive collateral is said to be information-insensitive.

During a credit boom, as more and more firms access loans, the economy reaches a tipping point where information production becomes too tempting. This temptation disrupts the short-term debt market, leading to a credit crunch and the exclusion of most firms from the credit market. Macroeconomics and Financial Crises provides a detailed account of how financial crises are triggered by information events and how they impact the broader economy.

The book offers new perspectives on the intricate relations between macroeconomics and financial crises, challenging the traditional view that financial crises are solely caused by external factors such as market imperfections or government policies. Instead, the book emphasizes the role of endogenous factors and the feedback loops that exist within the macroeconomic system.

By rethinking how financial crises are inherent features of macroeconomic dynamics, Macroeconomics and Financial Crises provides valuable insights for policymakers, investors, and scholars alike. The book offers a comprehensive framework for understanding the causes and consequences of financial crises, as well as potential strategies for mitigating their impact.

In conclusion, Macroeconomics and Financial Crises is a groundbreaking book that offers a fresh perspective on the origins and consequences of financial crises. By examining the interplay between technological change, credit booms, and endogenous information production, the book challenges the conventional understanding of financial crises and provides valuable insights for policymakers, investors, and scholars. This book is a must-read for anyone interested in understanding the complex dynamics of the macroeconomy and the potential risks associated with financial instability.

Weight: 588g
Dimension: 186 x 261 x 21 (mm)
ISBN-13: 9780691227016