Working Paper（25-014E）Asset Price Booms, Debt Overhang and Debt Disorganization

We propose a tractable model of nancial crises that replicates the empirical regularities: A credit-fueled assetprice boom tends to collapse, followed by a deep and persistent recession with productivity declines. Riskshifting rms amplify the boom and bust of asset prices by purchasing assets with borrowed money. The resulting debt overhang reduces productivity by discouraging borrowing rms from spending additional e ort. This ine ciency causes shrinkage of the production network through demand externality, which we call debtdisorganization. The larger asset-price boom is followed by a deeper and more persistent recession. Lenders know that debt reduction can increase lenders payo , and when the debt burden is small, they restructure the debt on their own and attain social optimum. When debt is large, government subsidies to encourage lenders to implement debt restructuring are necessary to reduce externality and restore aggregate productivity.

Key words: Zombie lending, bank recapitalization, time inconsistency, the debt La er curve.
JEL Classi cation: E02, G01, G33

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Working Paper（25-014E）Asset Price Booms, Debt Overhang and Debt Disorganization