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Collateral amplification under complete markets

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  • Nikolov, Kalin

Abstract

This paper examines the robustness of the Kiyotaki–Moore collateral amplification mechanism to the existence of complete markets for aggregate risk. We show that, when borrowers can hedge against aggregate shocks at fair prices, the volatility of endogenous variables becomes identical to the first best in the absence of credit constraints. The collateral amplification mechanism disappears.

Suggested Citation

  • Nikolov, Kalin, 2014. "Collateral amplification under complete markets," Journal of Economic Dynamics and Control, Elsevier, vol. 45(C), pages 80-93.
    • Handle: RePEc:eee:dyncon:v:45:y:2014:i:c:p:80-93
    DOI: 10.1016/j.jedc.2014.05.015
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    Cited by:

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    3. Alfred Duncan, 2016. "Private information and business cycle risk sharing," Working Papers 2016_02, Business School - Economics, University of Glasgow.
    4. Candian, Giacomo & Dmitriev, Mikhail, 2020. "Optimal contracts and supply-driven recessions," Economics Letters, Elsevier, vol. 197(C).
    5. Alfred Duncan & Charles Nolan, 2017. "Financial Frictions in Macroeconomic Models," Studies in Economics 1719, School of Economics, University of Kent.

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    More about this item

    Keywords

    Collateral constraints; Amplification;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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