As the access to this document is restricted, you may want to look for a different version below or search for a different version of it. Ryo Kato, Mark L. Gertler, Himmelberg, Stern School of Business, Department of Economics.
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This paper is a theoretical study into how credit constraints interact with aggregate economic activity over the business cycle.
We construct a model of a dynamic economy in which lenders cannot force borrowers to repay their debts unless the debts are secured. In such an economy, durable assets such as land, buildings and machinery play a dual role: they are not only factors of production, but they also serve as collateral for loans. Borrowers' credit limits are affected by the prices of the collateralized assets.
And at the same time, these prices are affected by the size of the credit limits. The dynamic interaction between credit limits and asset prices turns out to be a powerful transmission mechanism by which the effects of shocks persist, amplify, and spill over to other sectors.
We show that small, temporary shocks to technology or income distribution can generate large, persistent fluctuations in output and asset prices. Published: Kiyotaki, Nobuhiro and John Moore. Development of the American Economy. Economic Fluctuations and Growth. International Finance and Macroeconomics. International Trade and Investment. Productivity, Innovation, and Entrepreneurship. Gender in the Economy Study Group.
Illinois Workplace Wellness Study. The Oregon Health Insurance Experiment. The Science of Science Funding Initiative. Candidates are evaluated based on their research records and their capacity to contribute to the NBER's activities by program directors and steering committees. New affiliates must hold primary academic appointments in North America. Environmental and Energy Policy and the Economy.
Moore that shows how small shocks to the economy might be amplified by credit restrictions, giving rise to large output fluctuations. The model assumes that borrowers cannot be forced to repay their debts. Therefore, in equilibrium, lending occurs only if it is collateralized. That is, borrowers must own a sufficient quantity of capital that can be confiscated in case they fail to repay. This collateral requirement amplifies business cycle fluctuations because in a recession , the income from capital falls, causing the price of capital to fall, which makes capital less valuable as collateral, which limits firms' investment by forcing them to reduce their borrowing, and thereby worsens the recession.