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Borrowing Constraints, Multiple Equilibria and Monetary Policy

Tiziana Assenza

MPRA Paper from University Library of Munich, Germany

Abstract: The appealing feature of Kiyotaki and Moore's Financial Accelerator model (Kiyotaki and Moore, 1997, 2002) is the linkage of asset price changes and borrowing constraints. This framework therefore is the natural vehicle to explore the net worth channel of the monetary transmission mechanism. In the original model, however, all the variables, credit included, are in real terms. In order to assess the impact of monetary policy the model must be reformulated to fit a monetary economy. In the present paper we model a monetary economy with financing constraints adopting the Money In the Utility function (MIU) approach.The occurrence of multiple equilibria is a likely outcome of the dynamics generated by the model. A change in the growth rate of money supply can affect real out- put through the impact of inflation on net worth. In a sense the monetary transmission mechanism we are focusing on consists of a combination of the inflation tax effect and the net worth channel. Contrary to the traditional view, at least for some parameter restrictions, an increase of the inflation tax can bring about an increase of aggregate output.

JEL-codes: E31 E32 E44 E52 (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fdg, nep-mac and nep-mon
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