MT - 09. Credit Cycles

Question 1

Topic Summary (2)

Answer 1

1. Potential to address RBC shortcomings of lack of propagation and amplification, no hump shaped responses
   - Kiyotaki and Moore (1997), Kocherlakote (2000), originated in Veblen (1904)
2. Credit constraints and assets and collateral can generate larger responses from small shocks
   - Kiyotaki (1998 – response in growth rate of aggregate wealth)

Question 2

Seminal Papers (4)

Answer 2

• Kiyotaki and Moore (1997), Kocherlakote (2000), originated in Veblen (1904)
• Kiyotaki (1998)

Question 3

Kiyotaki and Moore (1997)

Answer 3

Aim: collateral constraints incorporated into RBC

Conclusion: presence of collateral constraints can generate the effect that small temporary technology/income shocks can generate large and persistent fluctuations in output and asset prices.

Question 4

Kiyotaki (1998)

Answer 4

Aim: dynamic economy models where creditors cannot force repayment unless debts are secured by collateral

Collateral acts as a powerful propagation mechanism through interactions between collateral asset value, net worth, and credit limits.

Conclusion: fixed asset collateral –> small, temporary shocks to technology or wealth distribution generate large and persistent fluctuations in output and asset prices.

Question 5

Kiyotaki and Moore (2012)

Answer 5

Aim: model an economy with a spectrum of assets, return characterised by their liquidity. Use the model to investigate two things

Borrowing Constraint + Re-saleability Constraint
- Money has a role purely due to liquidity

• To finance investment, she uses i.) cash and ii.) previous equity –> BUT…only a fraction of equity can be sold

Fiat money helps to alleviate the problem that investors are unable to offer savers adequeate compensation

Conclusion: fiat money circulation lubricates the transfer of goods from savers to investors, re-saleability drives a wedge between cash and other assets. Incentive to hold cash comes from knowing you will be credit constrained in the future when you would like to invest.

1. Equity prices drive key feedback: asset markets  rest of economy
2. Policy prescription – use OMO to change to liquidity mix of private sector asset holdings.

Question 6

Kocherlakote (2000)

Answer 6

– credit constraints can create amplification and propagation mechanism in cycles –> quantitatively depend upon model parameter calibration

Question 7

Brunnermeier, Eisenback and Sannikov (2013)

Answer 7

– financial frictions give persistence, and combined with illiquidity –> amplification

Question 8

Butt et al. (2014)

Answer 8

– QE and bank lending channel, QE did not operate via traditional bank lending channel as in Kashyap and Stein –> QE operates via portfolio rebalancing channel

Question 9

Kashyap and Stein (1995)

Answer 9

– data consistent with lending view of MP transmission –> ie. Via availability and terms of bank loans