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On the Amplification Role of Collateral Constraints

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  • Caterina Mendicino

Abstract

Following the seminal contribution of Kiyotaki and Moore (1997), the role of collateral constraints for business cycle fluctuations has been highlighted by several authors and collateralized debt is becoming a popular feature of business cycle models. In contrast, Kocherlakota (2000) and Cordoba and Ripoll (2004) demonstrate that collateral constraints per se are unable to propagate and amplify exogenous shocks, unless unorthodox assumptions on preferences and production technologies are made. The aim of this paper is to examine the contribution of costly debt enforcement procedures in the amplification of business cycle fluctuations through collateral constraints. We show that for realistic degrees of inefficiency, collateral constraints can significantly amplify the effects of productivity shocks on output even under standard assumptions on preferences and technology.

Suggested Citation

  • Caterina Mendicino, 2008. "On the Amplification Role of Collateral Constraints," Staff Working Papers 08-23, Bank of Canada.
    • Handle: RePEc:bca:bocawp:08-23
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    References listed on IDEAS

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    Cited by:

    1. Catalina Granda Carvajal, 2015. "Informality and macroeconomic volatility: do credit constraints matter?," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 42(6), pages 1095-1111, November.
    2. Mr. Jan Vlcek & Mr. Scott Roger, 2012. "Macrofinancial Modeling At Central Banks: Recent Developments and Future Directions," IMF Working Papers 2012/021, International Monetary Fund.
    3. Neri, Stefano & Notarpietro, Alessandro, 2019. "Collateral constraints, the zero lower bound, and the debt–deflation mechanism," Economics Letters, Elsevier, vol. 174(C), pages 144-148.

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    More about this item

    Keywords

    Business fluctuations and cycles; Credit and credit aggregates;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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