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Borrowing Constraints, Multiple Equilibria and Monetary Policy

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  • Assenza, Tiziana

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 out- put 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 University Library of Munich, Germany in its series MPRA Paper with number 4049.

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Date of creation: 2007
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Handle: RePEc:pra:mprapa:4049

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  1. Matteo Iacoviello, 2002. "House prices, borrowing constraints and monetary policy in the business cycle," Boston College Working Papers in Economics, Boston College Department of Economics 542, Boston College Department of Economics, revised 06 Dec 2004.
  2. Cordoba, Juan & Ripoll, Marla, 2002. "Credit Cycles Redux," Working Papers, Rice University, Department of Economics 2002-07, Rice University, Department of Economics.
  3. Juan Carlos Cordoba & Marla Ripoll, 2004. "Collateral Constraints in a Monetary Economy," Journal of the European Economic Association, MIT Press, MIT Press, vol. 2(6), pages 1172-1205, December.
  4. 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.
  5. Ben Bernanke & Mark Gertler, 1987. "Financial Fragility and Economic Performance," NBER Working Papers 2318, National Bureau of Economic Research, Inc.
  6. 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.
  7. 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.
  8. 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.
  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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