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On the amplification role of collateral constraints

  • Caterina Mendicino

How important are collateral constraints for the propagation and amplification of shocks? To address this question, we analyze a stochastic general equilibrium version of the model by Kiyotaki and Moore (JPE, 1997) in which all agents face concave production and utility functions and are generally identical, except for the subjective discount factor. We document that the existence of costly debt enforcement plays an important role in the endogenous amplification generated by the model. Limiting the amount of borrowing up to a reasonable fraction of the value of the collateral asset, makes the amplification generated by collateral constraints sizable and significantly larger than what we observe either in the representative agent version of the model, or in the version of the model where inefficiencies in the liquidation of the collateralized asset are neglected.

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Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w201115.

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Date of creation: 2011
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Handle: RePEc:ptu:wpaper:w201115
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