Financial intermediation and capital misallocation hengjie ai, kai li, and fang yang march 1, 2015 abstract to understand the link between. The kiyotaki and moore 1997 model is one of the leading macro models of. The basic idea of the costly enforcement approach is that borrowers face a binding borrowing constraint, where the constraint is some function of the marketvalue of their assets. For instance, kiyotaki and moore 1997 emphasize the amplication e. This 4we think we could prove versions of our results in monetary environments like bewley 1980 or. Kiyotaki moore 1997 show how small, temporary productivity shocks can generate large, persistent fluctuations in output and asset prices. In particular, our model can i derive aggregate capital adjustment cost functions identical to those assumed by hayashi. This approach stresses the role of balance sheets in constraining borrower spending in a setting with nancial market frictions. See general information about how to correct material in repec for technical questions regarding this item, or to correct its authors, title, abstract, bibliographic. Nobuhiro kiyotaki and john moore journal of political economy, 1997, vol. Evil is the root of all money by nobuhiro kiyotaki and john moore. More recently, however, the spotlight has fallen on the liquidation value of physical assets that rms can pledge as collateral hart and moore,1994.
Lecture 2, liquidity, business cycles, and monetary policy. Also, following wong 2015, we use a relatively if not completely general class of preferences. Nobuhiro kiyotaki and john moore source university of york. In kiyotakimoore, tomorrows investment will raise the price of the store of value, which is used as an input in the production process. Also notice that c0 t and c t only appear in 1 and 2,sothey will adjust so that 1 and 2 hold. Lessons from the financial crisis and their implications. Holmstrom and tirole 1997, and kiyotaki and moore 1997. Kiyotaki and moore 1997, credit cycles, journal of political economy 10. Similarly, b t will be given by equation 5, so we solve it by hand as well.
Credit chains, with john moore, lse, revised in 1997. The kiyotakimoore model of credit cycles is an economic model developed by nobuhiro. Bernanke andgertler 1989, kiyotaki and moore 1997 andothers focus on credit constraints faced by non. Money and banking johannes boehm boston university. Credit cycles, nber working papers 5083, national bureau of economic research, inc.
Economic fluctuations and growth this paper is a theoretical study into how credit constraints interact with aggregate economic activity over the business cycle. Nobuhiro kiyotaki university of minnesota and federal reserve bank of minneapolis john moore london school of economics and heriotwatt university we construct a model of a dynamic economy in which lenders cannot force borrowers to repay their debts unless the debts are secured. All material on this site has been provided by the respective publishers and authors. University of minnesota and federal reserve bank of minneapolis. We are particularly interested in identifying empirical channels that creditmarket shocks propagate through firm. Credit risk and disaster risk preliminary and incomplete. Nevertheless, the credit cycle literature missed some important elements of the leverage cycle. The type of borrowing constraints can have an important impact on macro. The effects of quantitative easing on bank lending behavior. Nobuhiro kiyotaki national bureau of economic research. The credit cycle featured the multiplieraccelerator feedback from good news about asset dividends, to higher asset prices, to more borrowing, to more investments improving asset values. When requesting a correction, please mention this items handle. Assuming that commercial banks target constant leverage ratios adrian. Countries should move from bankfinance to capital markets.
Procyclical movement in balance sheet strength ampli es spending uctuations and thus uctuations in aggregate economic activity. Manuscripts of clarendon lectures 2001, with john moore. Overviewmodelcommentssummary important international rami cations currency devaluation august 2015 daily reference rate down 1. Collateral amplification under complete markets european central. In such an economy, durable assets play a dual role.
The seminal work of kiyotakimoore 1997 demonstrated how under certain conditions this feedback may amplify the response of the economy to changes in technology. To simplify matters, kiyotaki and moore also assume that. Intermediary leverage cycles and financial stability. Greenwald and stiglitz 2003, kiyotaki and moore 1997, bernanke and gertler 1989, and stiglitz and weiss 1992. That said, there is a fundamental difference between models featuring collateral constraints and our framework with respect to the. Shleifer and vishny 1992 show how asset liquidity, high debt capacity, and easy credit are mutually reinforcing. When credit is secured by collateral, a credit boom is associated with not only a higher leverage ratio but also a higher value of the collateralized assets. Here, unconventional monetary policy would raise the prices of mbs held as assets and lead to an improvement in the marktomarket value of bank equity. The real effects of financial markets wharton finance. Credit cycles, journal of political economy, 1997, v1052,apr, 211248.
Diamond and dybvig 1983, bank runs, deposit insurance, and liquidity, journal of political economy 11. Secondary market liquidity and the optimal capital structure. The type of borrowing constraints can have an important impact on macro nance mechanisms. Kiyotaki a macroeconomist and moore a contract theorist originally described their model in a 1997 paper in the journal of political. The paper shares with kiyotaki and moore 1997 the idea that investment decisions are intertemporal complements. Evil is the root of all money american economic association. As in the collateral model of kiyotakimoore km 1997 we adopt the method widely used in macroeconomics of studying the e. House prices, borrowing constraints, and monetary policy in the business cycle pdf. Adrian and shin 2009 document the procyclicality of leverage using data on broker dealers. Credit cycles nobuhiro kiyotaki and john moore jpe 1997 pisaniferry 2009 the research question question. Kiyotaki and moore 1997 showthatsmallshockscan be ampli. Landprice dynamics and macroeconomic fluctuations 3 formal empirical studies show that shocks to real estate prices have important e. Endogenous collateral constraints and the leverage cycle.
This in turn constrains real investment, and so frictions in primary financial markets end up reducing real economic activity. The credit cycle featured the multiplieraccelerator feedback from good news about asset dividends, to higher asset prices, to more borrowing, to more investments im. When borrowers are credit constrained, a negative shock can force them to sell assets, provoking a. Financial intermediation and credit policy in business. I they have di erent discount rates, 1997 t university of minnesota and federal reserve bank of minneapolis tt london school of economics and heriotwatt university this is a major revision of our july 1995 mimeo, credit chains. Brunnermeier michael sockin wei xiong feb, 2017 discussion by lin william cong. Kiyotaki and moore 1997, kiyotaki and moore 2005, bernanke et al. Economywide factor productivity and the aggregate growth rate are both. Inside money and liquidity, with john moore, lse revised in 2002. Credit market heterogeneity, balance sheet in dependence. Selffulfilling credit cycles washington university. Kiyotaki and moore 1997 is the seminal paper in the latter approach, and we discuss it here. Liquidity, business cycles, and monetary policy nobuhiro kiyotaki and john moore first version, june 2001 this version, april 2008 abstract this paper presents a model of monetary economy with di. Kiyotakimoore 1997, and also as unsecured reputational loans suggested in bulowrogo.
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