Collateral-driven booms lead to deep crises and slow recoveries, study finds.
Credit booms driven by high collateral values can lead to economic expansion but also information depletion, resulting in deep crises and slow recoveries. This happens because high collateral values reduce the need for screening, leading to a lack of information on existing projects. When the boom ends, there is a shortage of both collateral and project information, which takes time to rebuild. This theory is supported by US firm-level data.