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Collateral Secured Loans in a Monetary Economy

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  • Makoto Watanabe

    (Universidad Carlos III Madrid)

  • Leo Ferraris

    (Universidad Carlos III Madrid)

Abstract

Durable assets are widely used as collateral to secure the repayment of debt. This paper presents a monetary search model where durable assets can serve as a guarantee to repay consumption loans. In our economy, consumers can obtain loans from banks using their durable capital assets as collateral. In case repayment doesn't happen the bank can seize the amount committed as collateral. We prove the existence, uniqueness and we characterize steady state monetary equilibria with collateralized bank credit. We show that collateralized credit can be an important channel through which monetary factors can affect real variables, and that the effect of monetary growth on capital accumulation depends critically on the relative risk aversion of agents and the relative scarcity of durable capital goods in the economy.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 121.

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Date of creation: 2007
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Handle: RePEc:red:sed007:121

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  1. Douglas W. Diamond & Raghuram G. Rajan, 1998. "Liquidity risk, liquidity creation and financial fragility: a theory of banking," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
  2. Berentsen, Aleksander & Camera, Gabriele & Waller, Christopher, 2007. "Money, credit and banking," Journal of Economic Theory, Elsevier, vol. 135(1), pages 171-195, July.
  3. Shi, Shouyong, 1996. "Credit and Money in a Search Model with Divisible Commodities," Review of Economic Studies, Wiley Blackwell, vol. 63(4), pages 627-52, October.
  4. John Moore & Nobuhiro Kiyotaki, . "Credit Cycles," Discussion Papers 1995-5, Edinburgh School of Economics, University of Edinburgh.
  5. Lagos, Ricardo & Rocheteau, Guillaume, 2008. "Money and capital as competing media of exchange," Journal of Economic Theory, Elsevier, vol. 142(1), pages 247-258, September.
  6. Guillaume Rocheteau & Randall Wright, 2003. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," PIER Working Paper Archive 03-031, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  7. Ricardo Lagos & Randall Wright, 2004. "A unified framework for monetary theory and policy analysis," Staff Report 346, Federal Reserve Bank of Minneapolis.
  8. S. Boragan Aruoba & Randall Wright, 2002. "Search, money and capital: a neoclassical dichotomy," Working Paper 0208, Federal Reserve Bank of Cleveland.
  9. Ricardo Lagos & Guillaume Rocheteau, 2004. "Inflation, output, and welfare," Working Paper 0407, Federal Reserve Bank of Cleveland.
  10. S. Boragan Aruoba & Randall Wright, 2002. "Search, Money and Capital: A Neoclassical Dichotomy, Second Version," PIER Working Paper Archive 03-028, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 03 Sep 2003.
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Cited by:
  1. Berentsen, Aleksander & Waller, Christopher, 2011. "Outside versus inside bonds: A Modigliani–Miller type result for liquidity constrained economies," Journal of Economic Theory, Elsevier, vol. 146(5), pages 1852-1887, September.
  2. Randall Wright & Guillaume Rocheteau, 2011. "Liquidity and Asset Market Dynamics," 2011 Meeting Papers 103, Society for Economic Dynamics.
  3. Borghan Nezami Narajabad & Cyril Monnet, 2012. "Why Rent When You Can Buy? A Theory of Repurchase Agreements," 2012 Meeting Papers 647, Society for Economic Dynamics.
  4. KOBAYASHI Keiichiro, 2009. "Asset-Price Collapse and Market Disruption - A model of financial crises -," Discussion papers 09045, Research Institute of Economy, Trade and Industry (RIETI).
  5. Guillaume Rocheteau & Jose Antonio Rodriguez-Lopez, 2013. "Liquidity Provision, Interest Rates, and Unemployment," Working Papers 121311, University of California-Irvine, Department of Economics.
  6. Aleksander Berentsen & Christopher J. Waller, 2009. "Outside versus inside bonds: a Modigliani-Miller type result for liquidity constrained economies," Working Papers 2009-056, Federal Reserve Bank of St. Louis.
  7. Ferraris, Leo & Watanabe, Makoto, 2011. "Collateral fluctuations in a monetary economy," Journal of Economic Theory, Elsevier, vol. 146(5), pages 1915-1940, September.
  8. Ferraris, Leo, 2010. "On the complementarity of money and credit," European Economic Review, Elsevier, vol. 54(5), pages 733-741, July.
  9. David Andolfatto & Aleksander Berentsen & Christopher Waller, 2011. "Optimal disclosure policy and undue diligence," ECON - Working Papers 045, Department of Economics - University of Zurich.
  10. Yu Zhu & Randall Wright & Chao He, 2012. "Housing and Liquidity," 2012 Meeting Papers 94, Society for Economic Dynamics.
  11. Selcuk, Cemil, 2012. "Seasonal Cycles in the Housing Market," Cardiff Economics Working Papers E2012/1, Cardiff University, Cardiff Business School, Economics Section.
  12. David Andolfatto & Fernando M. Martin, 2012. "Information disclosure and exchange media," Working Papers 2012-012, Federal Reserve Bank of St. Louis.
  13. Li, Ying-Syuan & Li, Yiting, 2013. "Liquidity and asset prices: A new monetarist approach," Journal of Monetary Economics, Elsevier, vol. 60(4), pages 426-438.
  14. Aleksander Berentsen & Christopher Waller, 2008. "Outside Versus Inside Bonds," IEW - Working Papers 372, Institute for Empirical Research in Economics - University of Zurich.
  15. Randall Wright & Vaidyanathan (Venky) Venkateswaran, 2012. "Pledgability and Liquidity," 2012 Meeting Papers 601, Society for Economic Dynamics.
  16. José Suárez-Lledó, 2009. "Monetary Policy with Heterogeneous Collateralized Borrowing," Working Papers 374, Barcelona Graduate School of Economics.

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