OFR, Report: Technology Shocks and Predictable Minsky Cycles

“Major boom-bust cycles exhibit large positive productivity shocks followed by sharp, equally large reversals in productivity. We present a model in which news of a future productivity boom in an innovative sector immediately relaxes borrowing constraints, leading to a credit-filled boom. However, the expansion of credit is not sustainable and requires a contraction of credit when the innovative sector is most productive, leading to a slump in productivity going forward. These dynamics are more pronounced when information regards innovations in the far future. The predictable boom-bust cycles produced by reallocative technology shocks match the standard Minsky narrative in a way that shocks to financial markets directly do not.”