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Collateral Constraints in a Monetary Economy

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  • Cordoba, Juan Carlos
  • Ripoll, Marla

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.
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Suggested Citation

  • Cordoba, Juan Carlos & Ripoll, Marla, 2010. "Collateral Constraints in a Monetary Economy," Staff General Research Papers Archive 32123, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genres:32123
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    2. 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.
    3. Saki Bigio & Jennifer La’O, 2020. "Distortions in Production Networks," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(4), pages 2187-2253.
    4. Assenza, Tiziana & Delli Gatti, Domenico, 2013. "E Pluribus Unum: Macroeconomic modelling for multi-agent economies," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1659-1682.
    5. Assenza, Tiziana, 2007. "Borrowing Constraints, Multiple Equilibria and Monetary Policy," MPRA Paper 4049, University Library of Munich, Germany.
    6. Saki Bigio, 2013. "Financial Frictions in Production Networks," 2013 Meeting Papers 121, Society for Economic Dynamics.
    7. Li Lin & Dimitrios P. Tsomocos & Alexandros P. Vardoulakis, 2019. "Debt deflation effects of monetary policy," Chapters, in: Financial Regulation and Stability, chapter 9, pages 245-258, Edward Elgar Publishing.
    8. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95, May.
    9. 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.
    10. 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.
    11. 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.
    12. Barbar, Riham & Bosi, Stefano, 2010. "Collaterals and macroeconomic volatility," Research in Economics, Elsevier, vol. 64(3), pages 146-161, September.
    13. Mosler, Martin & Schaltegger, Christoph & Mair, Lukas & Brandt, Przemyslaw, 2025. "Who Absorbs the Debt-Deflation Channel? Empirical Evidence from Historical Balance Sheets and the Great Swiss Deflation," VfS Annual Conference 2025 (Cologne): Revival of Industrial Policy 325423, Verein für Socialpolitik / German Economic Association.
    14. Markus Brunnermeier & Sergio Correia & Stephan Luck & Emil Verner & Tom Zimmermann, 2025. "The Debt-Inflation Channel of the German (Hyper) Inflation," American Economic Review, American Economic Association, vol. 115(7), pages 2111-2150, July.
    15. Zhang, Haiping, 2005. "Limited Pledgeability, Asset Prices, and Macroeconomic Fluctuations," Bonn Econ Discussion Papers 11/2005, University of Bonn, Bonn Graduate School of Economics (BGSE).
    16. 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.
    17. 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.
    18. Dan Cao & Guangyu Nie, 2017. "Amplification and Asymmetric Effects without Collateral Constraints," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(3), pages 222-266, July.

    More about this item

    JEL classification:

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

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