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Collaterals and Macroeconomic Volatility

  • Riham Barbar

    (EPEE, University of Evry)

  • Stefano Bosi

    (EQUIPPE, University of Lille 1)

In this paper, we study the effects of collaterals on business cycles and growth in monetary economies with credit market imperfections. We consider an endogenous growth model with a partial cash-in-advance constraint and inelastic labor supply. We assume that the share of consumption purchases paid with credit depends positively on the collateral available to the agent. In this framework, we find that money is no longer superneutral in the long run and short-run fluctuations, either deterministic or stochastic, can arise. On the one side, the monetary policy can enhance the growth rate and welfare, on the other side, reduce the macroeconomic volatility. Second, the sensitivity to collaterals alters the effectiveness of monetary policy in terms of welfare and stability. Finally, indeterminacy becomes more likely as long as the credit market is less sensitive to collaterals.

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Paper provided by Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne in its series Documents de recherche with number 08-15.

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Length: 23 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:eve:wpaper:08-15
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  2. Feenstra, Robert C., 1986. "Functional equivalence between liquidity costs and the utility of money," Journal of Monetary Economics, Elsevier, vol. 17(2), pages 271-291, March.
  3. S. Rao Aiyagari & Zvi Eckstein, 1995. "Interpreting monetary stabilization in a growth model with credit goods production," Working Papers 525, Federal Reserve Bank of Minneapolis.
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  10. Svensson, Lars E O, 1985. "Money and Asset Prices in a Cash-in-Advance Economy," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 919-44, October.
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  12. Cooley, T.F. & Hansen, G.D., 1988. "The Inflation Tax In A Real Business Cycle Model," RCER Working Papers 155, University of Rochester - Center for Economic Research (RCER).
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  15. Charles T. Carlstrom & Timothy S. Fuerst, 2000. "Money growth rules and price level determinacy," Working Paper 0010, Federal Reserve Bank of Cleveland.
  16. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
  17. Bosi, Stefano & Magris, Francesco, 2003. "Indeterminacy and endogenous fluctuations with arbitrarily small liquidity constraint," Research in Economics, Elsevier, vol. 57(1), pages 39-51, March.
  18. Calvin Schnure, 2005. "Boom-Bust Cycles in Housing; The Changing Role of Financial Structure," IMF Working Papers 05/200, International Monetary Fund.
  19. Hromcova, Jana, 2003. "Money and growth in a cash-in-advance economy with costly credit," Economic Modelling, Elsevier, vol. 20(6), pages 1113-1136, December.
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