Collateral Constraints in a Monetary Economy
This paper studies the role of collateral constraints in transforming small monetary shocks into large persistent output fluctuations. 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. We find that a one-time exogenous monetary shock generates persistent movements in aggregate output, whose amplitude depends on whether or not debt contracts are contingent. If contingent contracts cannot be written, money shocks can trigger large output fluctuations. In this case a one time money expansion triggers a boom, while money contractions generate recessions. In contrast, if contracts are contingent amplification is not only smaller, but it can generate the reverse results. When the possibility of default and renegociation is considered, the model can generate asymmetric business cycles with recessions milder than booms. Finally, one-time shocks monetary shocks generate a highly persistent dampening cycle rather than a smoothly declining deviation.
|Date of creation:||04 Sep 2003|
|Date of revision:|
|Note:||Type of Document - pdf; prepared on LaTeX; pages: 36 ; figures: included|
|Contact details of provider:|| Web page: http://126.96.36.199|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998.
"The Financial Accelerator in a Quantitative Business Cycle Framework,"
NBER Working Papers
6455, National Bureau of Economic Research, Inc.
- Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
- Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers 98-03, C.V. Starr Center for Applied Economics, New York University.
- Falk, Barry, 1986.
"Further Evidence on the Asymmetric Behavior of Economic Time Series over the Business Cycle,"
Journal of Political Economy,
University of Chicago Press, vol. 94(5), pages 1096-1109, October.
- Falk, Barry L., 1986. "Further Evidence on the Asymmetric Behavior of Economic Time Series over the Business Cycle," Staff General Research Papers 11097, Iowa State University, Department of Economics.
- Narayana R. Kocherlakota, 2000. "Creating business cycles through credit constraints," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-10.
- Carlstrom, Charles T & Fuerst, Timothy S, 1997.
"Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis,"
American Economic Review,
American Economic Association, vol. 87(5), pages 893-910, December.
- Ryo Kato, 2002. "Matlab code for the Carlstrom-Fuerst AER (1997) model," QM&RBC Codes 112, Quantitative Macroeconomics & Real Business Cycles.
- Charles T. Carlstrom & Timothy S. Fuerst, 1996. "Agency costs, net worth, and business fluctuations: a computable general equilibrium analysis," Working Paper 9602, Federal Reserve Bank of Cleveland.
- Timothy S. Fuerst & Charles T. Carlstrom, 1998. "Agency costs and business cycles," Economic Theory, Springer, vol. 12(3), pages 583-597.
- Cooley, Thomas F. & Hansen, Gary D., 1998. "The role of monetary shocks in equilibrium business cycle theory: Three examples," European Economic Review, Elsevier, vol. 42(3-5), pages 605-617, May.
- Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
- Timothy S. Fuerst, 1994.
"Monetary and financial interaction in the business cycle,"
Federal Reserve Bank of Cleveland, pages 1321-1353.
- Fuerst, Timothy S, 1995. "Monetary and Financial Interactions in the Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1321-38, November.
- Thomas Cooley & Vincenzo Quadrini, 2006. "Monetary policy and the financial decisions of firms," Economic Theory, Springer, vol. 27(1), pages 243-270, 01.
- Scheinkman, Jose A & Weiss, Laurence, 1986. "Borrowing Constraints and Aggregate Economic Activity," Econometrica, Econometric Society, vol. 54(1), pages 23-45, January.
- Andrew B. Abel, 1985.
"Dynamic Behavior of Capital Accumulation in a Cash-in-Advance Model,"
NBER Working Papers
1549, National Bureau of Economic Research, Inc.
- Abel, Andrew B., 1985. "Dynamic behavior of capital accumulation in a cash-in-advance model," Journal of Monetary Economics, Elsevier, vol. 16(1), pages 55-71, July.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpma:0309003. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.