Collateral Secured Loans in a Monetary Economy

Makoto Watanabe and Leo Ferraris ()

No 121, 2007 Meeting Papers from Society for Economic Dynamics

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.

Date: 2007
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Journal Article: Collateral secured loans in a monetary economy (2008)
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