MACROECONOMIC IMPLICATIONS OF FINANCIAL CONSTRAINTS 2. Dual role of physical assets as input and...
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Transcript of MACROECONOMIC IMPLICATIONS OF FINANCIAL CONSTRAINTS 2. Dual role of physical assets as input and...
MACROECONOMIC IMPLICATIONS OF
FINANCIAL CONSTRAINTS
2. Dual role of physical assets as input and collateral.3. LAPM.
10th set of transparencies for ToCF
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KIYOTAKI - MOORE JPE 1997
Basic idea: one store of value, that is also an input into production process. "Commercial real estate", price p at date
possibility of multiple equilibria (and cycles)
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MODEL
Preferences: All agents have linear preferences:
Can be used as
Commercial Residential
Only store of value
Two classes of agents
receive endowment at beginning of Investors:
Two goods : Non durable ( endowment each period)
Durable: real estate A units
Entrepreneurs: no endowment must borrow entire investment (non durable good); but can hold real estate from last period (actually hold entire real estate in equilibrium).
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Production technology
Entrepreneur starting at t with a units of real estate. Invests / borrows i of date-t good. Requires of commercial real estate. rented as residential real estate at rental rate income
demand for residential real estate
date t
consumption of residential real estate
Contract• Rb in case of success + assets a to borrower• lenders receive
a in case of failure
if success
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No aggregate uncertainty deterministic path
End-of-period market for real estate investors sell assets they have seized successful entrepreneurs buy more
Continuation valuation of an entrepreneur starting with a at the beginning of date t :
arbitrage
and
Equilibrium
Debt capacity:
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where
or
Real estate market
Note: (net suppliers)
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MACROECONOMIC IMPLICATIONS OF FINANCIAL CONSTRAINTS
3. LAPM : Liquidity Premia and Asset Pricing
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