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Collateral Constraints in a Monetary Economy

  • Cordoba, Juan

    (Rice U)

  • Ripoll, Marla

    (U of Pittsburgh)

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.

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Paper provided by Rice University, Department of Economics in its series Working Papers with number 2002-02.

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Date of creation: Jan 2002
Date of revision:
Handle: RePEc:ecl:riceco:2002-02
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  1. Timothy S. Fuerst & Charles T. Carlstrom, 1998. "Agency costs and business cycles," Economic Theory, Springer, vol. 12(3), pages 583-597.
  2. Falk, Barry L., 1986. "Further Evidence on the Asymmetric Behavior of Economic Time Series over the Business Cycle," Staff General Research Papers 11097, Iowa State University, Department of Economics.
  3. Timothy S. Fuerst, 1994. "Monetary and financial interaction in the business cycle," Proceedings, Federal Reserve Bank of Cleveland, pages 1321-1353.
  4. Andrew B. Abel, 1985. "Dynamic Behavior of Capital Accumulation in a Cash-in-Advance Model," NBER Working Papers 1549, National Bureau of Economic Research, Inc.
  5. Cooley, Thomas F. & Hansen, Gary D., 1998. "The role of monetary shocks in equilibrium business cycle theory: Three examples," European Economic Review, Elsevier, vol. 42(3-5), pages 605-617, May.
  6. Scheinkman, Jose A & Weiss, Laurence, 1986. "Borrowing Constraints and Aggregate Economic Activity," Econometrica, Econometric Society, vol. 54(1), pages 23-45, January.
  7. Thomas Cooley & Vincenzo Quadrini, 2006. "Monetary policy and the financial decisions of firms," Economic Theory, Springer, vol. 27(1), pages 243-270, 01.
  8. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers 98-03, C.V. Starr Center for Applied Economics, New York University.
  9. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  10. Narayana R. Kocherlakota, 2000. "Creating business cycles through credit constraints," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-10.
  11. Carlstrom, Charles T & Fuerst, Timothy S, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis," American Economic Review, American Economic Association, vol. 87(5), pages 893-910, December.
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