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MACROECONOMIC IMPLICATIONS OF FINANCIAL CONSTRAINTS 2. Dual role of physical assets as input and collateral. 3. LAPM .

MACROECONOMIC IMPLICATIONS OF FINANCIAL CONSTRAINTS 2. Dual role of physical assets as input and collateral. 3. LAPM . 10th set of transparencies for ToCF. KIYOTAKI - MOORE JPE 1997. Basic idea:. one store of value, that is also an input into production process.

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MACROECONOMIC IMPLICATIONS OF FINANCIAL CONSTRAINTS 2. Dual role of physical assets as input and collateral. 3. LAPM .

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  1. MACROECONOMIC IMPLICATIONS OF FINANCIAL CONSTRAINTS 2. Dual role of physical assets as input and collateral. 3. LAPM. 10th set of transparencies for ToCF

  2. 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)

  3. MODEL Two goods : • Non durable ( endowment each period) • Durable: real estate A units Can be used as Commercial Residential • Investors: receive endowment at beginning of Preferences: All agents have linear preferences: Only store of value Two classes of agents • 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).

  4. a in case of failure if success 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 consumption of residential real estate date t Contract • Rbin case of success + assets a to borrower • lenders receive

  5. End-of-period market for real estate • investors sell assets they have seized • successful entrepreneurs buy more • Equilibrium No aggregate uncertainty deterministic path • Continuation valuation of an entrepreneur starting with a at the beginning of date t : arbitrage • Debt capacity: and

  6. Note: (net suppliers) where • Real estate market or

  7. MACROECONOMIC IMPLICATIONS OF FINANCIAL CONSTRAINTS 3. LAPM : Liquidity Premia and Asset Pricing

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