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Borrowing Constraints, Multiple Equilibria and Monetary Policy

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  • Assenza, T.

    ()
    (Universiteit van Amsterdam)

Abstract

The appealing feature of Kiyotaki and Moore's Financial Accelerator model (Kiyotaki and Moore, 1997, 2002) is the linkage of asset price changes and borrowing constraints. This framework therefore is the natural vehicle to explore the net worth channel of the monetary transmission mechanism. In the original model, however, all the variables, credit included, are in real terms. In order to assess the impact of monetary policy the model must be reformulated to fit a monetary economy. In the present paper we model a monetary economy with financing constraints adopting the Money In the Utility function (MIU) approach.The occurrence of multiple equilibria is a likely outcome of the dynamics generated by the model. A change in the growth rate of money supply can affect real output through the impact of inflation on net worth. In a sense the monetary transmission mechanism we are focusing on consists of a combination of the inflation tax effect and the net worth channel. Contrary to the traditional view, at least for some parameter restrictions, an increase of the inflation tax can bring about an increase of aggregate output.

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Paper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Working Papers with number 07-05.

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Date of creation: 2007
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Handle: RePEc:ams:ndfwpp:07-05

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Postal: Dept. of Economics and Econometrics, Universiteit van Amsterdam, Roetersstraat 11, NL - 1018 WB Amsterdam, The Netherlands
Phone: + 31 20 525 52 58
Fax: + 31 20 525 52 83
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Web page: http://www.fee.uva.nl/cendef/
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  1. Nobuhiro Kiyotaki & John Moore, 2002. "Evil Is the Root of All Money," American Economic Review, American Economic Association, American Economic Association, vol. 92(2), pages 62-66, May.
  2. Bernanke, Ben & Gertler, Mark, 1990. "Financial Fragility and Economic Performance," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(1), pages 87-114, February.
  3. Cordoba, Juan Carlos & Ripoll, Marla, 2010. "Credit Cycles Redux," Staff General Research Papers, Iowa State University, Department of Economics 32122, Iowa State University, Department of Economics.
  4. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
  5. Cooley, Thomas F. & Hansen, Gary D., 1998. "The role of monetary shocks in equilibrium business cycle theory: Three examples," European Economic Review, Elsevier, Elsevier, vol. 42(3-5), pages 605-617, May.
  6. Juan Carlos Cordoba & Marla Ripoll, 2003. "Collateral Constraints in a Monetary Economy," Macroeconomics, EconWPA 0309003, EconWPA.
  7. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 79(1), pages 14-31, March.
  8. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, American Economic Association, vol. 95(3), pages 739-764, June.
  9. Nobuhiro Kiyotaki & John Moore, 2002. "Balance-Sheet Contagion," American Economic Review, American Economic Association, American Economic Association, vol. 92(2), pages 46-50, May.
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