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Collateral Secured Loans in a Monetary Economy

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  • Makoto Watanabe

    (Universidad Carlos III Madrid)

  • Leo Ferraris

    (Universidad Carlos III Madrid)

Abstract

Durable assets are widely used as collateral to secure the repayment of debt. This paper presents a monetary search model where durable assets can serve as a guarantee to repay consumption loans. In our economy, consumers can obtain loans from banks using their durable capital assets as collateral. In case repayment doesn't happen the bank can seize the amount committed as collateral. We prove the existence, uniqueness and we characterize steady state monetary equilibria with collateralized bank credit. We show that collateralized credit can be an important channel through which monetary factors can affect real variables, and that the effect of monetary growth on capital accumulation depends critically on the relative risk aversion of agents and the relative scarcity of durable capital goods in the economy.

Suggested Citation

  • Makoto Watanabe & Leo Ferraris, 2007. "Collateral Secured Loans in a Monetary Economy," 2007 Meeting Papers 121, Society for Economic Dynamics.
  • Handle: RePEc:red:sed007:121
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    References listed on IDEAS

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    1. S. Boragan Aruoba & Randall Wright, 2003. "Search, money, and capital: a neoclassical dichotomy," Proceedings, Federal Reserve Bank of Cleveland, pages 1085-1117.
    2. Berentsen, Aleksander & Camera, Gabriele & Waller, Christopher, 2007. "Money, credit and banking," Journal of Economic Theory, Elsevier, pages 171-195.
    3. Guillaume Rocheteau & Randall Wright, 2005. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," Econometrica, Econometric Society, pages 175-202.
    4. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-248, April.
    5. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
    6. Shouyong Shi, 1996. "Credit and Money in a Search Model with Divisible Commodities," Review of Economic Studies, Oxford University Press, vol. 63(4), pages 627-652.
    7. Ricardo Lagos & Guillaume Rocheteau, 2005. "Inflation, Output, And Welfare," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 495-522, May.
    8. Marco Cagetti & Mariacristina De Nardi, 2004. "Taxation, entrepreneurship and wealth," Working Papers 632, Federal Reserve Bank of Minneapolis.
    9. Lagos, Ricardo & Rocheteau, Guillaume, 2008. "Money and capital as competing media of exchange," Journal of Economic Theory, Elsevier, pages 247-258.
    10. Douglas W. Diamond & Raghuram G. Rajan, 1998. "Liquidity risk, liquidity creation and financial fragility: a theory of banking," Proceedings, Federal Reserve Bank of San Francisco.
    11. S. Boragan Aruoba & Randall Wright, 2002. "Search, Money and Capital: A Neoclassical Dichotomy, Second Version," PIER Working Paper Archive 03-028, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 03 Sep 2003.
    12. S. Boragan Aruoba & Randall Wright, 2003. "Search, money, and capital: a neoclassical dichotomy," Proceedings, Federal Reserve Bank of Cleveland, pages 1085-1117.
    13. Douglas W. Diamond & Raghuram G. Rajan, 2001. "Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 287-327, April.
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