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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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References

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  1. Aleksander Berentsen & Gabriele Camera & Christopher Waller, 2005. "Money, Credit and Banking," CESifo Working Paper Series 1617, CESifo Group Munich.
  2. Ricardo Lagos & Guillaume Rocheteau, 2004. "Money and capital as competing media of exchange," Staff Report 341, Federal Reserve Bank of Minneapolis.
  3. Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
  4. Ricardo Lagos & Guillaume Rocheteau, 2004. "Inflation, output and welfare," Staff Report 342, Federal Reserve Bank of Minneapolis.
  5. Douglas W. Diamond & Raghuram G. Rajan, 1999. "Liquidity Risk, Liquidity Creation and Financial Fragility: A Theory of Banking," NBER Working Papers 7430, National Bureau of Economic Research, Inc.
  6. S. Boragan Aruoba & Randall Wright, 2002. "Search, money and capital: a neoclassical dichotomy," Working Paper 0208, Federal Reserve Bank of Cleveland.
  7. Guillaume Rocheteau & Randall Wright, 2004. "Money in search equilibrium, in competitive equilibrium, and in competitive search equilibrium," Working Paper 0405, Federal Reserve Bank of Cleveland.
  8. Ricardo Lagos & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper 0211, Federal Reserve Bank of Cleveland.
  9. 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.
  10. 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.
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Citations

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Cited by:
  1. Yu Zhu & Randall Wright & Chao He, 2013. "Housing and Liquidity," 2013 Meeting Papers 168, Society for Economic Dynamics.
  2. Aleksander Berentsen & Christopher Waller, 2010. "Outside versus Inside Bonds: A Modigliani-Miller Type Result for Liquidity Constrained Economies," CESifo Working Paper Series 3272, CESifo Group Munich.
  3. David Andolfatto & Fernando M. Martin, 2012. "Information disclosure and exchange media," Working Papers 2012-012, Federal Reserve Bank of St. Louis.
  4. Ferraris, Leo & Watanabe, Makoto, 2011. "Collateral fluctuations in a monetary economy," Journal of Economic Theory, Elsevier, vol. 146(5), pages 1915-1940, September.
  5. 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.
  6. Aleksander Berentsen & Christopher Waller, 2008. "Outside Versus Inside Bonds," IEW - Working Papers 372, Institute for Empirical Research in Economics - University of Zurich.
  7. David Andolfatto & Aleksander Berentsen & Christopher Waller, 2011. "Optimal disclosure policy and undue diligence," ECON - Working Papers 045, Department of Economics - University of Zurich.
  8. José Suárez-Lledó, 2009. "Monetary Policy with Heterogeneous Collateralized Borrowing," Working Papers 374, Barcelona Graduate School of Economics.
  9. 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.
  10. Selcuk, Cemil, 2012. "Seasonal cycles in the housing market," MPRA Paper 36225, University Library of Munich, Germany.
  11. Rocheteau, Guillaume & Wright, Randall, 2013. "Liquidity and asset-market dynamics," Journal of Monetary Economics, Elsevier, vol. 60(2), pages 275-294.
  12. 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).
  13. Ferraris, Leo, 2010. "On the complementarity of money and credit," European Economic Review, Elsevier, vol. 54(5), pages 733-741, July.
  14. Randall Wright & Vaidyanathan (Venky) Venkateswaran, 2012. "Pledgability and Liquidity," 2012 Meeting Papers 601, Society for Economic Dynamics.
  15. 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.
  16. Guillaume Rocheteau & Jose Antonio Rodriguez-Lopez, 2013. "Liquidity Provision, Interest Rates, and Unemployment," Working Papers 121311, University of California-Irvine, Department of Economics.

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