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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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File URL: http://epee.univ-evry.fr/RePEc/2008/08-15.pdf
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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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  1. Stefano Bosi & Frédéric Dufourt, 2005. "Indeterminacy with Constant Money Growth Rules and Income-Based Liquidity Constraints," Documents de recherche 05-22, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
  2. GRANDMONT, Jean-Michel & PINTUS, Patrick & de VILDER, Robin, 1997. "Capital-labor substitution and competitive nonlinear endogenous business cycles," CORE Discussion Papers 1997087, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Charles T. Carlstrom & Timothy S. Fuerst, 2000. "Money growth rules and price level determinacy," Working Paper 0010, Federal Reserve Bank of Cleveland.
  4. S. Rao Aiyagari & R. Anton Braun & Zvi Eckstein, 1998. "Transaction services, inflation, and welfare," Staff Report 241, Federal Reserve Bank of Minneapolis.
  5. 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.
  6. Robert E. Lucas, Jr. & Nancy L. Stokey, 1985. "Money and Interest in a Cash-in-Advance Economy," NBER Working Papers 1618, National Bureau of Economic Research, Inc.
  7. Juan Carlos Cordoba & Marla Ripoll, 2003. "Collateral Constraints in a Monetary Economy," Macroeconomics 0309003, EconWPA.
  8. Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model," American Economic Review, American Economic Association, vol. 79(4), pages 733-48, September.
  9. John Moore & Nobuhiro Kiyotaki, . "Credit Cycles," Discussion Papers 1995-5, Edinburgh School of Economics, University of Edinburgh.
  10. Ireland, Peter N, 1994. "Money and Growth: An Alternative Approach," American Economic Review, American Economic Association, vol. 84(1), pages 47-65, March.
  11. 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.
  12. Mankiw, N Gregory & Romer, David & Weil, David N, 1992. "A Contribution to the Empirics of Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 407-37, May.
  13. Stefano BOSI & Frédéric DUFOURT & Francesco MAGRIS, 2007. "Animal spirits in cash-in-advance economies," Discussion Papers (REL - Recherches Economiques de Louvain) 2007021, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  14. Stefano Bosi & Thomas Seegmuller, 2009. "On Rational Exuberance," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00367689, HAL.
  15. Grandmont, Jean-Michel & Younes, Yves, 1972. "On the Role of Money and the Existence of a Monetary Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 39(3), pages 355-72, July.
  16. 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.
  17. 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.
  18. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393.
  19. Calvin Schnure, 2005. "Boom-Bust Cycles in Housing: The Changing Role of Financial Structure," IMF Working Papers 05/200, International Monetary Fund.
  20. 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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