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Collateral secured loans in a monetary economy

  • Ferraris, Leo
  • Watanabe, Makoto

This paper presents a microfounded model of money where durable assets serve as a guarantee to repay consumption loans. We study a steady state equilibrium where money and credit coexist. In such an equilibrium, a larger investment in durable capital relaxes the borrowing constraint faced by consumers. We show that the occurrence of over-investment and the behavior of capital accumulation depend on the rate of inflation, the relative risk aversion of agents and the marginal productivity of the capital goods.

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File URL: http://www.sciencedirect.com/science/article/B6WJ3-4SJG6DP-1/2/80c9805e9895bec8c4c5d3c207cc9eab
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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 143 (2008)
Issue (Month): 1 (November)
Pages: 405-424

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Handle: RePEc:eee:jetheo:v:143:y:2008:i:1:p:405-424
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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  1. S. Boragan Aruoba & Randall Wright, 2003. "Search, money, and capital: a neoclassical dichotomy," Proceedings, Federal Reserve Bank of Cleveland, pages 1085-1117.
  2. Aleksander Berentsen & Gabriele Camera & Christopher Waller, 2005. "Money, Credit and Banking," CESifo Working Paper Series 1617, CESifo Group Munich.
  3. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
  4. Ricardo Lagos & Guillaume Rocheteau, 2006. "Money and capital as competing media of exchange," Working Paper 0608, Federal Reserve Bank of Cleveland.
  5. Douglas W. Diamond & Raghuram G. Rajan, . "Liquidity Risk, Liquidity Creation and Financial Fragility: A Theory of Banking," CRSP working papers 476, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  6. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
  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 & Guillaume Rocheteau, 2005. "Inflation, Output, And Welfare," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 495-522, 05.
  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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