Collateral Constraints in a Monetary Economy
Juan Cordoba () and
Marla Ripoll ()
Working Papers from Rice University, Department of Economics
The purpose of this paper is to analyze the role of collateral constraints as a transmission mechanism of monetary shocks. 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. In the model, a one-time exogenous monetary shock generates persistent movements in aggregate output, whose amplitude depends on the degree of debt indexation. Monetary expansions can trigger a large upward movement in output, while monetary contractions give rise to a smaller downward movement. This asymmetry occurs because full indexation of debt contracts can only be effective following a monetary contraction. In contrast, following a monetary expansion indexation can only be partial because debtors end up paying back just the market value of the collateral. Due to the existence of both cash-in-advance and collateral constraints, monetary shocks generate a highly persistent dampening cycle rather than a smoothly declining deviation.
JEL-codes: E32 (search for similar items in EconPapers)
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Working Paper: Collateral Constraints in a Monetary Economy (2010)
Journal Article: Collateral Constraints in a Monetary Economy (2004)
Working Paper: Collateral Constraints in a Monetary Economy (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:riceco:2002-02
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