Credit Cycles

This paper is an extended theoretical study into the model of Kiyotaki and Moore (1997), which can be divided into two parts. First we study the potential role of collateral constraints as a transmission mechanism of aggregate macro economy variables shocks. We do this by introducing a cash-in-advance constraint for consumption and investment in the real-economy. The analysis has shown that the credit mechanism can amplify shocks and make them highly persistent, so that small, temporary disturbances to productivity or monetary policy have large and persistent effects on output. Second, we consider the model in corporate finance theoretic foundation. Due to the collateral constraint limits, the real estate will concentrate to the high productivity firms, exacerbating the wealth distribution. The economy can have multiple steady states, some with high asset value, rental rate, debt capacities, and economic activity, and others with lower values of each of these variables.