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Collateral constraint and news-driven cycles

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  • Tomoyuki Nakajima

    (Kyoto University;)

  • Masaru Inaba

    (RIETI)

  • Keiichiro Kobayashi

    (RIETI;)

Abstract

We also show that when the news turns out to be wrong, the economy may fall into a recession, instead of simply jumping back to the initial steady state. This is because, when the good news arrives, borrowers sell their land, since they need less land to achieve the desired value of collateral. When the news turns out to be wrong, the land price goes back to its steady state level, and hence the total value of collateral becomes lower than the steady state level. It follows that the financial constraint becomes tighter, which increases the labor market inefficiency, and reduces labor, output, and so on.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 320.

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Date of creation: 2007
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Handle: RePEc:red:sed007:320

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