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Collateral Constraints in a Monetary Economy

Author

Listed:
  • Cordoba, Juan

    (Rice U)

  • Ripoll, Marla

    (U of Pittsburgh)

Abstract

The purpose of this paper is to analyze the role of collateral constraints as a transmission mechanism of monetary shocks. 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. In the model, a one-time exogenous monetary shock generates persistent movements in aggregate output, whose amplitude depends on the degree of debt indexation. Monetary expansions can trigger a large upward movement in output, while monetary contractions give rise to a smaller downward movement. This asymmetry occurs because full indexation of debt contracts can only be effective following a monetary contraction. In contrast, following a monetary expansion indexation can only be partial because debtors end up paying back just the market value of the collateral. Due to the existence of both cash-in-advance and collateral constraints, monetary shocks generate a highly persistent dampening cycle rather than a smoothly declining deviation.

Suggested Citation

  • Cordoba, Juan & Ripoll, Marla, 2002. "Collateral Constraints in a Monetary Economy," Working Papers 2002-02, Rice University, Department of Economics.
  • Handle: RePEc:ecl:riceco:2002-02
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    File URL: http://www.ruf.rice.edu/~econ/papers/2002papers/02Cordoba.pdf
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    References listed on IDEAS

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    Cited by:

    1. Anna Agliari & Tiziana Assenza & Domenico Delli Gatti & Emiliano Santoro, 2006. "Credit Cycles in a OLG Economy with Money and Bequest," Computing in Economics and Finance 2006 369, Society for Computational Economics.
    2. Assenza, Tiziana, 2007. "Borrowing Constraints, Multiple Equilibria and Monetary Policy," MPRA Paper 4049, University Library of Munich, Germany.
    3. Assenza, Tiziana & Agliari, Anna & Delli Gatti, Domenico & Santoro, Emiliano, 2009. "Borrowing constraints and complex dynamics in an OLG framework," Journal of Economic Behavior & Organization, Elsevier, vol. 72(2), pages 656-669, November.
    4. Patrick Pintus & Yi Wen, 2013. "Leveraged Borrowing and Boom-Bust Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(4), pages 617-633, October.
    5. Awijen, Haithem & Hammami, Sami, 2017. "Financial frictions and regime switching: The role of collateral asset in emerging stock market," Economics Discussion Papers 2017-6, Kiel Institute for the World Economy (IfW).
    6. Jessica Roldan Pena & Virginia Olivella, 2010. "Re-examining the role of financial constraints in business cycles: is something wrong with the credit multiplier?," 2010 Meeting Papers 377, Society for Economic Dynamics.
    7. Lin, Li & Tsomocos, Dimitrios P. & Vardoulakis, Alexandros P., 2015. "Debt deflation effects of monetary policy," Journal of Financial Stability, Elsevier, vol. 21(C), pages 81-94.
    8. Nan-Kuang Chen & Yu-Hsi Chou & Jyh-Lin Wu, 2013. "Credit Constraint and the Asymmetric Monetary Policy Effect on House Prices," Pacific Economic Review, Wiley Blackwell, vol. 18(4), pages 431-455, October.
    9. Assenza, Tiziana & Delli Gatti, Domenico, 2013. "E Pluribus Unum: Macroeconomic modelling for multi-agent economies," Journal of Economic Dynamics and Control, Elsevier, pages 1659-1682.
    10. Barbar, Riham & Bosi, Stefano, 2010. "Collaterals and macroeconomic volatility," Research in Economics, Elsevier, pages 146-161.
    11. repec:aea:aejmac:v:9:y:2017:i:3:p:222-66 is not listed on IDEAS
    12. Haiping Zhang, 2005. "Speculation in Standard Auctions with Resale," Bonn Econ Discussion Papers bgse11_2005, University of Bonn, Germany.

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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