Collateral constraint and news-driven cycles

Tomoyuki Nakajima, Masaru Inaba and Keiichiro Kobayashi

No 320, 2007 Meeting Papers from Society for Economic Dynamics

Abstract: We also show that when the news turns out to be wrong, the economy may fall into a recession, instead of simply jumping back to the initial steady state. This is because, when the good news arrives, borrowers sell their land, since they need less land to achieve the desired value of collateral. When the news turns out to be wrong, the land price goes back to its steady state level, and hence the total value of collateral becomes lower than the steady state level. It follows that the financial constraint becomes tighter, which increases the labor market inefficiency, and reduces labor, output, and so on.

Date: 2007
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Related works:
Journal Article: COLLATERAL CONSTRAINT AND NEWS-DRIVEN CYCLES (2012)
Working Paper: Collateral Constraint and News-driven Cycles (2007)
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