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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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References

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  1. Comin, D. & Gertler, M., 2003. "Medium Term Business Cycles," Working Papers 03-05, C.V. Starr Center for Applied Economics, New York University.
  2. Nir Jaimovich & Sergio Rebelo, 2006. "Can News About the Future Drive the Business Cycle?," NBER Working Papers 12537, National Bureau of Economic Research, Inc.
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  8. Enrique G. Mendoza, 2006. "Endogenous Sudden Stops in a Business Cycle Model with Collateral Constraints:A Fisherian Deflation of Tobin's Q," NBER Working Papers 12564, National Bureau of Economic Research, Inc.
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  12. Beaudry, Paul & Portier, Franck, 2007. "When can Changes in Expectations Cause Business Cycle Fluctuations in Neo-Classical Settings?," Open Access publications from University of Toulouse 1 Capitole http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
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