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Macroeconomics and Financial Crises

Bound Together by Information Dynamics

(with Gary Gorton)

Princeton University Press

Forthcoming, July 2023


There are no bigger disruptions in the functioning of economies than financial crises. Yet prior to the crash of 2007–2008, macroeconomics incorporated financial crises simply as bad shocks, like earthquakes, failing to consider them as an intrinsic phenomenon of the evolution of macroeconomic variables, such as credit, investment, and productivity. Macroeconomics and Financial Crises rethinks how technological change, credit booms, and endogenous information production combine to generate financial crises as inherent and recurrent reactions to macroeconomic dynamics.

Gary Gorton and Guillermo Ordoñez identify short-term debt, collateral, and information as common elements that are present in all financial crises. Short-term debt is a critical element for storing value over short periods without fear of loss, but there needs to be collateral backing the debt. Critically, the collateral should be such that no agent wants to produce information about its quality. The debt backed by such collateral is information-insensitive. Gorton and Ordoñez argue that, during a credit boom, as more and more firms get loans, the economy reaches a tipping point where information production becomes too tempting, disrupting short-term debt and cutting most firms out of the credit market.

Showing how a financial crisis is an information event triggered by the dynamics of macroeconomic variables, Macroeconomics and Financial Crises provides new perspectives on the intricate relations between macroeconomics and financial crises.

“Economics has been treating financial crises as disruptive events beyond equilibrium explanation. Gorton and Ordoñez challenge this view by showing that crises are information events amenable to equilibrium analysis. This book advances our understanding of financial crises and shows, theoretically and empirically, how incorporating them can enrich macroeconomic analyses.”—Bengt Holmström, Nobel Laureate in Economics.

“This landmark graduate book provides a novel perspective on credit booms and financial crises centered around informational insensitivity, opacity, and liquidity of short-term debt. It is essential reading for anyone who wants to be on the cutting edge of the financial crisis research frontier.”—Markus K. Brunnermeier, Princeton University, coauthor of A Crash Course on Crises

“Through a collection of fascinating facts, narratives, and models, Gorton and Ordoñez synthesize and expand their decade-long research project on the key role played by collateral-quality information and credit in financial crises. It is now required reading in my financial crises course.”—Ricardo Caballero, Massachusetts Institute of Technology

“What happens when an asset that is widely accepted as collateral suddenly becomes suspect? Using a modern theory approach rooted in information and informed by history, Gorton and Ordoñez explore what causes, follows, and cures a financial crisis. A must-read for anyone seeking the frontier of research at the intersection of macroeconomics, banking, and finance.”—Laura L. Veldkamp, Columbia University, author of Information Choice in Macroeconomics and Finance


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