This paper presents a microfounded model of money where durable assets serve as a guarantee to repay consumption loans. We study a steady state equilibrium where money and credit coexist. In such an equi- librium, a larger investment in durable capital relaxes the borrowing constraint faced by consumers. We show that the occurrence of over-investment and the behavior of capital accumulation depend on the rate of inflation, the relative risk aversion of agents and the marginal productivity of the capital goods
This paper studies economy-wide fluctuations that occur endogenously in the presence of monetary and real assets. Using a standard monetary search model, we consider an economy in which agents can increase consumption, over and above what their liquid monetary asset holdings would allow, pledging real assets as collateral for monetary loans. It is shown that, if the liquidation value of real assets is below full market value, a stable cyclical equilibrium can emerge in consumption and capital around the unstable steady state. We also provide conditions for the existence of cycles of higher order, chaos and sunspot equilibria
We develop a theory of the interaction between the entry of lenders and the real sector. The high liquidation skills of incumbent lenders render them too tough in terminating high-risk/return projects. Being "foreign" to the market, newcomers have lower ability to liquidate than incumbents. This makes them softer in liquidating high-risk/return projects but renders their funding more costly. We show that the entry of lenders and the share of high-risk/return projects can reinforce each other through firms' liquidation values. This interaction dampens the output impact of liquidity shocks. Hence, financial liberalization can enhance stability. Copyright 2007 The Ohio State University.
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