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Collateral Constraint And News-Driven Cycles

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  • Kobayashi, Keiichiro
  • Nakajima, Tomoyuki
  • Inaba, Masaru

Abstract

We develop business-cycle models with financial constraints, the driving force of which is news about the future (i.e., changes in expectations). We assume that an asset with fixed supply (“land†) is used as collateral, and firms need to hold collateral to finance their input costs. The latter feature introduces an interaction between the inefficiencies in the financial market and in the factor market. Good news raises the price of land today, which relaxes the collateral constraint. It, in turn, reduces the inefficiency in the labor market. If this force is sufficiently strong, the equilibrium labor supply increases. So do output, investment, and consumption. Our models also generate procyclical movement in Tobin's Q. We also show that when the news turns out to be wrong, the economy may fall into a recession.

Suggested Citation

  • Kobayashi, Keiichiro & Nakajima, Tomoyuki & Inaba, Masaru, 2012. "Collateral Constraint And News-Driven Cycles," Macroeconomic Dynamics, Cambridge University Press, vol. 16(5), pages 752-776, November.
  • Handle: RePEc:cup:macdyn:v:16:y:2012:i:05:p:752-776_00
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