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Collateral Constraints in a Monetary Economy

  • Juan Carlos Cordoba

    (Rice University)

  • Marla Ripoll

    (University of Pittsburgh)

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.

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Paper provided by EconWPA in its series Macroeconomics with number 0309003.

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Length: 36 pages
Date of creation: 04 Sep 2003
Date of revision:
Handle: RePEc:wpa:wuwpma:0309003
Note: Type of Document - pdf; prepared on LaTeX; pages: 36 ; figures: included
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  1. 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.
  2. Timothy S. Fuerst, 1994. "Monetary and financial interaction in the business cycle," Proceedings, Federal Reserve Bank of Cleveland, pages 1321-1353.
  3. Scheinkman, Jose A & Weiss, Laurence, 1986. "Borrowing Constraints and Aggregate Economic Activity," Econometrica, Econometric Society, vol. 54(1), pages 23-45, January.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. Thomas Cooley & Vincenzo Quadrini, 2006. "Monetary policy and the financial decisions of firms," Economic Theory, Springer, vol. 27(1), pages 243-270, 01.
  9. Timothy S. Fuerst & Charles T. Carlstrom, 1998. "Agency costs and business cycles," Economic Theory, Springer, vol. 12(3), pages 583-597.
  10. 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.
  11. Narayana R. Kocherlakota, 2000. "Creating business cycles through credit constraints," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-10.
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