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A model of borrower reputation as intangible collateral

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  • Nikolov, Kalin

Abstract

In this paper, we build a framework which can generate endogenous fluctuations in downpayment requirements. We extend the model of Kiyotaki and Moore (1997) by considering an environment, in which savers can keep their anonymity but borrowers cannot. This allows lenders to punish defaulting borrowers by excluding them from future borrowing. They cannot however stop them from saving in the anonymous financial market. We show how the possibility of such market exclusion can lead to the emergence of intangible collateral in equilibrium alongside the tangible collateral which is usually studied in the literature. Fluctuations in the value of intangible collateral are isomorphic to fluctuations in the amount of borrowing firms can secure against the value of their tangible assets. We find that, when we combine the intangible collateral mechanism in our paper with counter-cyclical variance of idiosyncratic productivity shocks, this helps to generate realistic negative co-movement of downpayment requirements and aggregate output over the business cycle. In this case, the presence of intangible collateral increases the amplification of business cycle fluctuations relative to the standard Kiyotaki-Moore (1997) model.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 32939.

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Date of creation: 2011
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Handle: RePEc:pra:mprapa:32939

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Keywords: Collateral constraints; Aggregate fluctuations;

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  1. George-Marios Angeletos & Laurent Calvet, 2003. "Idiosyncratic Production Risk, Growth, and the Business Cycle," NBER Working Papers 9764, National Bureau of Economic Research, Inc.
  2. den Haan, Wouter J & Marcet, Albert, 1990. "Solving the Stochastic Growth Model by Parameterizing Expectations," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 31-34, January.
  3. Timothy J Kehoe & David K Levine, 1993. "Debt Constrained Asset Markets," Levine's Working Paper Archive 1276, David K. Levine.
  4. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  5. Covas, Francisco & Den Haan, Wouter, 2007. "The Role of Debt and Equity Finance over the Business Cycle," CEPR Discussion Papers 6145, C.E.P.R. Discussion Papers.
  6. Juan-Carlos Cordoba & Marla Ripoll, 2004. "Credit Cycles Redux," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(4), pages 1011-1046, November.
  7. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
  8. Fernando Alvarez & Urban J. Jermann, 2000. "Efficiency, Equilibrium, and Asset Pricing with Risk of Default," Econometrica, Econometric Society, vol. 68(4), pages 775-798, July.
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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. A model of borrower reputation as intangible collateral
    by Christian Zimmermann in NEP-DGE blog on 2013-01-15 02:39:13
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Cited by:
  1. Aoki, Kosuke & Nikolov, Kalin, 2012. "Bubbles, banks and financial stability," Working Paper Series 1495, European Central Bank.

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