Collateral Constraints in a Monetary Economy
AbstractThis paper studies the role of collateral constraints in transforming small monetary shocks into large persistent output fluctuations. We do this by introducing money in the heterogeneous-agent real economy of Kiyotaki and Moore (1997). Money enters in a cash-in-advance constraint and is injected via open-market operations. We find that a one-time exogenous monetary shock generates persistent movements in aggregate output, whose amplitude depends on whether or not debt contracts are contingent. If contingent contracts cannot be written, money shocks can trigger large output fluctuations. In this case a one time money expansion triggers a boom, while money contractions generate recessions. In contrast, if contracts are contingent amplification is not only smaller, but it can generate the reverse results. When the possibility of default and renegociation is considered, the model can generate asymmetric business cycles with recessions milder than booms. Finally, one-time shocks monetary shocks generate a highly persistent dampening cycle rather than a smoothly declining deviation.
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Bibliographic InfoPaper provided by EconWPA in its series Macroeconomics with number 0309003.
Length: 36 pages
Date of creation: 04 Sep 2003
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collateral constraints; liquidity constraints; monetary policy ; business cycles; open market operations;
Other versions of this item:
- Cordoba, Juan Carlos & Ripoll, Marla, 2010. "Collateral Constraints in a Monetary Economy," Staff General Research Papers 32123, Iowa State University, Department of Economics.
- Cordoba, Juan & Ripoll, Marla, 2002. "Collateral Constraints in a Monetary Economy," Working Papers 2002-02, Rice University, Department of Economics.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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