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Occasionally Binding Collateral Constraints in RBC Models

Listed author(s):
  • Emilio Espino & Thomas Hintermaier

On the one hand, recently a number of theoretical models have highlighted the role of credit market frictions in propagating and amplifying macroeconomic shocks. On the other hand, it still seems an open question whether this role is quantitatively significant. Our paper tries to fill this gap. We construct a DSGE model in the tradition of the RBC literature. Within this framework, we impose restrictions on asset trading which follow from the credit constraint structure used by, for example, Kiyotaki and Moore (1997) and Kocherlakota (2000). Except for those collateral constraints we assume that markets are complete, considering a full set of Arrow securities. Our main focus is on the quantitative impact of collateral constraints on equilibrium allocations and prices. Therefore, we study amplification and persistence, some asset pricing implications, and the welfare issues in such a model. The crucial aspect of our approach is that collateral constraints are occasionally binding. This is in contrast to the previous literature that has made assumptions strong enough to ensure that collateral constraints were always (i.e., for all periods) binding for the same subset of agents. The feature of occasionally binding constraints also makes our model challenging from a computational point of view. To this end, we implement a collocation version of projection methods in the spirit of Judd (1992) and Christiano and Fisher (2000)

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 194.

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Date of creation: 11 Aug 2004
Handle: RePEc:sce:scecf4:194
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