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Collateral Constraints in a Monetary Economy

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  • Cordoba, Juan

    (Rice U)

  • Ripoll, Marla

    (U of Pittsburgh)

Abstract

The purpose of this paper is to analyze the role of collateral constraints as a transmission mechanism of monetary shocks. We do this by introducing money in the heterogeneous-agent real economy of Kiyotaki and Moore (1997). Money enters in a cash-in-advance constraint and is injected via open-market operations. In the model, a one-time exogenous monetary shock generates persistent movements in aggregate output, whose amplitude depends on the degree of debt indexation. Monetary expansions can trigger a large upward movement in output, while monetary contractions give rise to a smaller downward movement. This asymmetry occurs because full indexation of debt contracts can only be effective following a monetary contraction. In contrast, following a monetary expansion indexation can only be partial because debtors end up paying back just the market value of the collateral. Due to the existence of both cash-in-advance and collateral constraints, monetary shocks generate a highly persistent dampening cycle rather than a smoothly declining deviation.

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Bibliographic Info

Paper provided by Rice University, Department of Economics in its series Working Papers with number 2002-02.

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Date of creation: Jan 2002
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Handle: RePEc:ecl:riceco:2002-02

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  1. 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.
  2. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers, C.V. Starr Center for Applied Economics, New York University 98-03, C.V. Starr Center for Applied Economics, New York University.
  3. Fuerst, Timothy S, 1995. "Monetary and Financial Interactions in the Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 27(4), pages 1321-38, November.
  4. Falk, Barry, 1986. "Further Evidence on the Asymmetric Behavior of Economic Time Series over the Business Cycle," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(5), pages 1096-1109, October.
  5. Thomas Cooley & Vincenzo Quadrini, 2006. "Monetary policy and the financial decisions of firms," Economic Theory, Springer, Springer, vol. 27(1), pages 243-270, 01.
  6. Narayana R. Kocherlakota, 2000. "Creating business cycles through credit constraints," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-10.
  7. Carlstrom, Charles T & Fuerst, Timothy S, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis," American Economic Review, American Economic Association, American Economic Association, vol. 87(5), pages 893-910, December.
  8. Scheinkman, Jose A & Weiss, Laurence, 1986. "Borrowing Constraints and Aggregate Economic Activity," Econometrica, Econometric Society, Econometric Society, vol. 54(1), pages 23-45, January.
  9. Timothy S. Fuerst & Charles T. Carlstrom, 1998. "Agency costs and business cycles," Economic Theory, Springer, Springer, vol. 12(3), pages 583-597.
  10. Abel, Andrew B., 1985. "Dynamic behavior of capital accumulation in a cash-in-advance model," Journal of Monetary Economics, Elsevier, Elsevier, vol. 16(1), pages 55-71, July.
  11. 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.
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Cited by:
  1. Agliari, A. & Assenza, T. & Delli Gatti, D. & Santoro, E., 2007. ""Credit Cycle" in an OLG Economy with Money and Bequest," CeNDEF Working Papers 07-04, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  2. Riham Barbar & Stefano Bosi, 2008. "Collaterals and Macroeconomic Volatility," Documents de recherche, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne 08-15, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
  3. Tiziana Assenza & Domenico Delli Gatti, 2012. "E Pluribus Unum: Macroeconomic Modelling for Multi-agent Economies," GREDEG Working Papers, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis 2012-08, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
  4. Haiping Zhang, 2005. "Speculation in Standard Auctions with Resale," Bonn Econ Discussion Papers, University of Bonn, Germany bgse11_2005, University of Bonn, Germany.
  5. Nan-Kuang Chen & Yu-Hsi Chou & Jyh-Lin Wu, 2013. "Credit Constraint and the Asymmetric Monetary Policy Effect on House Prices," Pacific Economic Review, Wiley Blackwell, Wiley Blackwell, vol. 18(4), pages 431-455, October.
  6. Assenza, Tiziana & Agliari, Anna & Delli Gatti, Domenico & Santoro, Emiliano, 2009. "Borrowing constraints and complex dynamics in an OLG framework," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 72(2), pages 656-669, November.
  7. Barbar, Riham & Bosi, Stefano, 2010. "Collaterals and macroeconomic volatility," Research in Economics, Elsevier, Elsevier, vol. 64(3), pages 146-161, September.
  8. Patrick Pintus & Yi Wen, 2013. "Leveraged Borrowing and Boom-Bust Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(4), pages 617-633, October.
  9. Assenza, T., 2007. "Borrowing Constraints, Multiple Equilibria and Monetary Policy," CeNDEF Working Papers 07-05, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  10. Jessica Roldan Pena & Virginia Olivella, 2010. "Re-examining the role of financial constraints in business cycles: is something wrong with the credit multiplier?," 2010 Meeting Papers, Society for Economic Dynamics 377, Society for Economic Dynamics.

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