Kiyotaki & Moore () – Credit Cycles. The Idea. Motivation. ▻ There is a range of emprical micro evidence that the balance sheet of firms is important to their. Kiyotaki and Moore . Econ , Spring .. Kiyotaki and Moore , which we will come to later. • The fact that Credit cycles. Journal of Political. This paper is a theoretical study into how credit constraints interact with aggregate economic activity over the business cycle. We construct a model of a dyna.
|Published (Last):||27 November 2014|
|PDF File Size:||1.62 Mb|
|ePub File Size:||15.33 Mb|
|Price:||Free* [*Free Regsitration Required]|
Moore that shows how small shocks to the economy might be amplified by credit restrictions, giving rise to large output fluctuations. The model assumes that borrowers cannot be forced to repay their creddit.
Therefore, in equilibrium, lending occurs only if it is vredit. That is, borrowers must own a sufficient quantity of capital that can be confiscated in case they fail to repay. This collateral requirement amplifies business cycle fluctuations because in kjyotaki recessionthe income from capital falls, causing the price of capital to fall, which makes capital less valuable as collateral, which limits firms’ investment by forcing them to reduce their borrowing, and thereby worsens the recession.
Kiyotaki a macroeconomist and Moore a contract theorist originally described their model in a paper in the Journal of Political Economy.
The Kiyotaki—Moore model shows instead how relatively small shocks might suffice to explain business cycle fluctuations, if credit markets are imperfect.
In their model economy, Kiyotaki and Moore assume two types of decision makerswith different time preference rates: The “impatient” agents are called “farmers” in the original paper, but should be interpreted as entrepreneurs or firms that wish to borrow in order to finance their investment projects.
Two key assumptions limit the effectiveness of the credit market in the model. First, the knowledge of the “farmers” is an essential input to their own investment projects—that is, a project becomes worthless if the farmer who made the investment chooses to abandon it.
Kiyotaki–Moore model – Wikipedia
Second, farmers cannot be forced to work, and therefore they cannot sell off their future labor to guarantee their debts. Together, these assumptions imply that even though farmers’ investment projects are potentially very valuable, lenders have no way to confiscate this value if farmers choose not to pay back their debts.
Therefore, loans will only be made if they are backed by some other form of capital which can be confiscated in case of default.
In other words, loans must be backed by collateral. Kiyotaki and Moore’s paper considers land as an example of a collateralizable asset.
Thus land plays two distinct roles in the model: Hence, impatient agents mooe provide real estate as collateral if they wish to borrow. If for any reason the value of real estate declines, cyclee does the amount of debt they can acquire.
This feeds back into the real estate market, driving the price of land down further thus, the borrowing decisions of the impatient kiyota,i are strategic complements.
This positive feedback is what amplifies economic fluctuations in the model. The paper also analyzes cases where debt contracts are set only in nominal terms or where contracts can be set in real terms, and considers the differences between the cases.
The original paper of Kiyotaki and Moore was theoretical in nature, and made little attempt to evaluate the quantitative relevance of their mechanism for actual economies. InKiyotaki’s student Matteo Iacoviello embedded the Kiyotaki-Moore mechanism inside a standard New Keynesian general equilibrium macroeconomic kiuotaki. From Wikipedia, the free encyclopedia. Structure of the model [ edit ] In their model economy, Kiyotaki and Moore assume two types of decision makerswith different time preference rates: Extensions [ edit ] The original paper of Kiyotaki and Moore was theoretical in nature, and made little attempt to evaluate the quantitative relevance of their mechanism for actual economies.